French yoghurt maker Danone on Friday agreed to buy a 25% stake in Hong Kong-listed Yashili International Holdings for HK$4.4 billion (US$567 million), enabling it to expand its brands and distribution footprint in mainland China.
“Danone mainly has the Dumex brand in China in terms of infant nutrition powder, which is more at the premium end of the market,” Torsten Stocker, partner at management consulting firm AT Kearney, told FinanceAsia.
“For Danone, it is more a broadening of the brand portfolio towards mid-priced or mid-tier brands," said Stocker, adding that Yashili could also benefit from Danone's expertise in formulating infant nutrition powder.
The dairy sector has been stirring with activity, as foreign companies are keen to get their formula right in China, a market rich with promise. In late August, New Zealand dairy group Fonterra launched a tender offer to buy a stake of up to 20% in infant formula maker Beingmate, worth NZ$615 million (US$514 million).
The Chinese government has also been pushing for consolidation within the dairy sector, particularly after the tainted milk scandal in 2008, which resulted in the death of six infants.
This deal extends the scope of the strategic alliance in fresh dairy products first established in 2013 between China Mengniu Dairy, Danone and Cofco, China’s leading state-owned company in the food sector.
In 2013, Danone formed a joint venture with Cofco and the latter sold a 4% stake in China Mengniu Dairy to Danone. Cofco remained the single largest shareholder of China Mengniu Dairy. In February, Danone doubled its stake in China Mengniu Dairy from 4% to 9.9% for HK$5.1 billion.
Danone will join other shareholders in taking a stake in Yashili. Late last year, Singapore's investment fund Temasek Holdings, China private equity firm Hopu and three other investors bought shares in Yashili at HK$3.50 per share.
"It's a growing area. The smart money is putting their money in dairy in China," said one source familiar with the matter.
The proceeds will be used to expand and strengthen Yashili’s infant milk formula business. Following the sale, China Mengniu’s stake in Yashili will be diluted to 51% from 68% previously. Danone is subscribing to 1.1 billion new shares at HK$3.70 per share, a premium of about 16.7% over Yashili's closing price on October 30.
Despite the premium, Yashili stock fell nearly 10% to HK$2.86 on Friday afternoon after the stock had resumed trading. The stock had traded as low as HK$2.09 on October 3 and risen during the weeks leading up to the deal announcement. According to the source, it is possible that investors had bought Yashili stock on rumours of a takeover offer and were disappointed when there was no secondary share sale.
As part of this agreement, Danone will recommend candidates to serve as Yashili’s CEO, Danone said in a statement. Danone will also have the right to nominate a number of directors to the Yashili board in proportion to its investment.
Danone, Mengniu and Yashili will also study the possibility of an equity investment in Danone’s subsidiary Dumex China.
"We are today strengthening the winning team formed by Danone and Mengniu by acquiring an equity stake in Yashili - combining Mengniu’s wide-reaching network in China with Danone’s international expertise in infant milk products," said Emmanuel Faber, Danone's CEO, in the statement.
Danone’s acquisition of the stake in Yashili is subject to the approval of Yashili's shareholders at their extraordinary general meeting and of the relevant authorities. It is expected to be finalised in coming months.
Yashili was founded in 1983 and has more than 5,000 staff. It specialises in the research, development and manufacturing of nutritious food and has infant milk formula as its core product.
HSBC advised Danone. Barclays advised Yashili.
