Yashili eyes China’s baby formula boom, set to buy Danone’s unit for HK$1.2 billion

Mainland milk company expand by buying French peer

PUBLISHED : Wednesday, 02 December, 2015, 7:02pm
UPDATED : Wednesday, 02 December, 2015, 7:02pm

Yashili, a top Chinese baby formula maker, agreed Wednesday on a deal to buy domestic rival Dumex China, a unit of French dairy giant Danone SA, for 150 million euro (HK$1.2 billion) in cash, according to a joint statement by Yashili and its majority shareholder Mengniu Dairy.

Shares of Yashili advanced 1.6 per cent in Hong Kong to close at HK$1.94, while China Mengniu Dairy Company ended flat at HK$12.36.

The deal came after Danone, Yashili and Mengniu Dairy signed in July a memorandum of understanding (MOU) that said Danone will sell Dumex to Yashili and use the proceeds to buy shares in Mengniu Dairy, one of China’s largest milk producers.

However, Mengniu said in the Wednesday statement that the company and Danone agreed not to proceed with the share transaction.

Danone, which owns 25 per cent of Yashili, has been trying to revive its struggling Dumex unit, once China’s top baby formula brand, after Dumex took a hard hit in sales from a 2013 food safety scare involving its key supplier the Fonterra cooperative in New Zealand.

In the wake of the incident, Dumex recalled thousands of units of its milk formula products across Asian markets. Although the scare turned out to be a false alarm, Dumex has been struggling to win back its lost market share in China.

Last year, Dumex recorded a profit loss of 771 million yuan, compared with a net profit of 765 million yuan in 2012. Its revenues also shrank sharply, falling to 1.3 billion yuan in 2014 from 2012’s 5.7 billion yuan.

Meantime, Yashili has also been suffering from a decline in sales and profits since Mengniu bought the company in 2013.

In 2014, Yashili posted a 28 per cent on-year fall in revenues, while its net profits slid 43 per cent.

Last week, Yashili issued a profit warning and expected to record a 55 per cent decline in earnings for fiscal 2015, citing reasons including shrinking sales in its traditional and modern distribution channels.

Yashili faces “intense industry competition” and faces difficulty in competing with foreign infant milk formula brands, JP Morgan analysts said in research report last week.

“The acquisition will change the market structure of China’s baby formula business, allowing Yashili to use Dumex’s distribution channels and boost its competitiveness,” Industrial Securities said in an earlier report shortly after Yashili, Danone and Mengniu signed the MOU in July.

The deal is subject to the approval of regulators and shareholders, Yashili said.