China Mengniu Dairy

Mengniu sets up yogurt venture with Danone

French firm takes strategic stake in mainland dairy giant seeking to move on from scandals

PUBLISHED : Tuesday, 21 May, 2013, 12:00am
UPDATED : Tuesday, 21 May, 2013, 4:39am

Shares in China Mengniu jumped more than 10 per cent yesterday after the company said it will introduce the French dairy-foods maker Danone as a strategic shareholder, with the two firms agreeing to set up a yogurt joint venture.

The deal boosted investor confidence in the company, based in Inner Mongolia, which is expected to benefit from its new European partner's management experience and product innovation capability, as Mengniu seeks to move on from a series of food safety scandals.

For Danone, the investment in Mengniu is its latest effort to expand in China after its decade-long co-operation with Hangzhou Wahaha Group, the largest soft drink manufacturer in China, ended in 2009.

Mengniu's share price rose by the most in four years before closing at HK$27.05, up 10.4 per cent yesterday. The Hang Seng Index climbed 1.8 per cent. Under the agreement, Danone will own an indirect interest of about 4 per cent in Mengniu through forming a joint venture with Cofco, Mengniu's largest single shareholder, and may also increase the interest in future.

Danone, based in Paris, will own 49 per cent of the joint venture and Cofco the remaining 51 per cent. Danone will also take a 20 per cent stake in a venture with Mengniu for the production and sale of chilled yogurt products. Danone will assign senior executives to assist Mengniu to improve management. Yesterday Danone said it was investing about €325 million (HK$3.24 billion) in the two projects.

Danone is the second overseas partner introduced by Mengniu in the past year. Last June, it signed an agreement to sell a 6 per cent stake to the Danish-Swedish dairy giant Arla Food and establish a plant with Arla.

Charlie Chen, an analyst at BNP Paribas, said: "Change will not happen overnight for Mengniu but at least it shows the company's determination to improve its product quality."

Mengniu has been involved in several food safety scandals in recent years, the latest being in December 2011, when excessive cancer-causing aflatoxin M1 was found in some milk products made by its Sichuan factory.

Sunny Kwok, an analyst at Guotai Junan Hong Kong, said Mengniu's yogurt business has had a relatively low profit margin compared to rivals, propelling the company to seek expertise from outside.