dairy industry

China Mengniu Dairy

Mengniu pays HK$6.92 billion to buy out China’s largest dairy herd

PUBLISHED : Thursday, 05 January, 2017, 12:46pm
UPDATED : Thursday, 05 January, 2017, 11:01pm

Mengniu Dairy, the country’s second-largest dairy producer, said it will pay a 3 per cent premium to market price to buy out an associate that controls China’s largest cattle herd, solidifying its grip on milk supplies amid an intensifying battle for market share with larger competitor Inner Mongolia Yili Industrial.

Mengniu will pay HK$6.92 billion (US$892 million) to buy out China Modern Dairy, after an initial HK$1.87 billion bid to raise its stake triggered a mandatory general offer. The initial bid for 965.5 million shares of Modern Dairy was made at HK$1.94 per share, according to a statement to the Hong Kong Stock Exchange.

Mengniu is building up its holdings in Modern Dairy while Yili is on course to take the lead in their race for the palates of discerning Chinese households for untainted and premium dairy. Mengniu and Yili are based in Inner Mongolia’s Hohhot city, the hub of China’s dairy industry.

“Modern Dairy may start to reserve its best-quality milk exclusively for Mengniu” after the takeover, said Song Liang, an independent dairy analyst. Nestlé S.A and Chinese agribusiness New Hope Group have also been major clients of the Chinese raw milk supplier.

The source of milk is a primary and vital concern for Chinese shoppers, as their confidence had been eroded by a scandal involving melamine-tainted baby formula in 2008. Chinese shoppers have been the biggest group of buyers of baby formula, milk powder and dairy products in New Zealand, Australia and other dairy-producing countries for many years, often pushing up prices in local markets by overwhelming supplies with the sheer volume of their purchases.

“High quality and stable raw milk supply is essential to the success of high-end dairy products,” Mengniu said in its statement.

Modern Dairy owns cattle farms with 114,600 cows as of June, the largest herd of the sort in China, giving Mengniu the “highly recognised” production standards to enhance its offerings of safe and premium dairy products, according to the statement.

Mengniu will be buying its Modern Dairy stake from a venture between private equities firms KKR China Growth Fund and CDH Fund IV, according to the statement. After the purchase, Mengniu will appoint directors to Modern Dairy’s board to replace Julian Wolhardt and Hui Chi-kin, according to the statement.

Both Mengniu and Yili have been scrambling to buy up dairy farms outside China to secure reliable and safe milk supply, as the country’s dairy industry recovers from the tainted-milk scandal almost a decade ago.

“The two are playing a chasing game in putting dairy farms under their own watchful eyes,”Song said.

In October, Yili announced a 4.6 billion yuan takeover of China’s largest producer of organic milk China Shengmu Organic Milk – a Hong Kong-listed competitor of Modern Dairy.

Chinese raw milk suppliers had been crippled with plunging global milk prices for two years, before taking relief from a price rebound in the second half of 2016.

Modern Dairy had been among the worst hit, swinging to a first-half loss of 565.66 million yuan (HK$633.5 million), compared to a profit of 507 million yuan a year earlier.

Mengniu didn’t fare any better during the slump in milk prices, booking a 20 per cent decline in first-half earnings in 2016.

Modern Dairy’s shares rose as much as 9.4 per cent before closing Thursday trading at HK$1.91 after the buyout was announced, while Mengniu’s shares settled down 2.69 per cent from the previous close.

Mengniu’s offer price of HK$1.94 is a 3.2 per cent premium to Modern Dairy’s closing price of HK$1.88 on January 3.