• Thu
  • Jul 10, 2014
  • Updated: 9:48am

China Mengniu Dairy

China Mengniu Dairy Co (HK stock code: 2319) makes dairy products and ice cream in China, and is based in Inner Mongolia. It was founded in 1999 by Niu Gensheng, a former employee of Yili, another Inner Mongolian dairy group. In May 2013, a Danone Group joint venture said it would become a strategic investor in China Mengniu Dairy, with a stake of about four per cent.

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Mengniu, Danone's China yogurt joint-venture terms reveal distrust

Analysts say agreement between the two food companies to produce yogurt on the mainland betrays a wariness honed by hard experience

PUBLISHED : Wednesday, 14 August, 2013, 12:00am
UPDATED : Wednesday, 14 August, 2013, 5:48am

The terms of a yogurt joint-venture between China Mengniu Dairy and Danone reflect the mistrust between two parties, analysts say.

Hong Kong-listed Mengniu and Danone, a Paris-listed conglomerate, describe the details as legal formalities.

Mengniu fears Danone management wants to take control of the business. Danone's track record in China has been that it is very aggressive in taking control of businesses. Danone has a bad track record with joint ventures in China
Nomura analyst Emma Liu

"There is distrust between Mengniu and Danone," said Sunny Kwok, a Guotai Junan analyst. "Mengniu does not want to sell all its assets to Danone."

Cofco, the largest Chinese state-owned food conglomerate, is Mengniu's biggest shareholder, with a 19 per cent stake, while Danone, the world's largest producer of fresh dairy products, became the second-biggest shareholder, with 8 per cent, in May.

Danone and Mengniu inked a deal on Friday to set up a joint venture to produce yogurt on the mainland. Mengniu will own 80 per cent and Danone 20 per cent, Mengniu said on Monday.

If Danone violates the terms of the joint venture, Mengniu has the right to buy Danone's 20 per cent stake at a discount of up to 40 per cent. If Mengniu violates the terms, Danone has the right to sell its stake to Mengniu at a premium of up to 40 per cent, according to Mengniu's announcement.

"Mengniu fears Danone management wants to take control of the business," Nomura analyst Emma Liu said. "Danone's track record in China has been that it is very aggressive in taking control of businesses. Danone has a bad track record with joint ventures in China."

In 2006, Danone and Mengniu established a yogurt business with an investment of 1.6 billion yuan. The joint venture failed the following year.

Danone quit a water joint-venture with Bright Food in 2011. The French firm exited its 39 joint ventures with Chinese beverage company Wahaha in 2009, following legal battles between the firms. Under the terms of the deal, if the new joint venture produces yogurt that has quality problems that hurt the reputation of Danone or Mengniu, Danone has the right to terminate the venture and sell its stake to Mengniu.

This clause was not in the memorandum of understanding in May that initiated the joint venture, a Danone spokeswoman said.

Danone recently withdrew its Dumex infant formula from mainland shops over fears it might contain an unsafe ingredient from Fonterra, a New Zealand milk products company. A Mengniu spokeswoman said the new joint venture terms were not related to the Fonterra scare.

Although Mengniu's announcement on Monday said Friday's contract contained revisions to an earlier agreement agreed in May, spokeswomen for both companies said the new terms were just legal technicalities.

Meanwhile, Kwok said: "The Chinese government is cautious about giving too much milk assets to foreign firms. The Chinese government wants to get foreign companies' technology but doesn't want to sell all the assets, as the Chinese milk products market is growing."

Euromonitor International projects the mainland yogurt market will grow 57 per cent to 71.6 billion yuan (HK$90 billion) by 2015.

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