Arla Foods to acquire stake in China Mengniu Dairy

Swedish-Danish dairy co-operative Arla Foods has entered into an agreement to buy a 6% stake in China Mengniu Dairy from private equity firm Investment Management for DKK1.7bn ($289.20m).

The investment is part of Arla Foods’ plan to strengthen its presence in China, where consumers are showing preference towards foreign brands over local brands due to several dairy scandals in recent years.

This deal would make Arla Foods the second-largest shareholder in Mengniu Dairy after state-owned food and beverage firm COFCO.

Under the agreement, Arla plans to expand its product offerings to include a full range of dairy products under the Arla brand. The dairy co-operative already distributes milk powder under a joint venture agreement with Mengniu.

Arla will also establish the China-Denmark Milk Technology and Cooperation Centre to offer expertise on milk quality, traceability and controlled milk production on farms.

Arla Foods CEO Peder Tuborgh said the deal will help the co-operative gain a solid foothold in the Chinese market, which is still growing rapidly.

"It will contribute positively to our cooperative owners’ milk price from day one, as we are able to add more value to milk that we, otherwise, would have to sell on the global bulk trading market where the profit is lower historically," Tuborgh added.

The deal is expected to boost Arla’s revenue in China five-fold by 2016. The co-operative generated a revenue of DKK700m ($119.08m) in 2011.

Arla noted that China is one of its five strategic growth markets, along with Russia, the US, Poland and the Middle East and North Africa region, where it seeks to create long-term growth opportunities.

Demand for dairy products in China is outgrowing production. With the dairy sector growing at an annual rate of 10%, the country is expected to overtake the US as the world’s largest market for dairy products by 2020.

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Image: Arla Foods’ latest deal to acquire a 6% stake in Mengniu Dairy will make it the second largest shareholder in the Chinese company, after state-owned food and beverage firm COFCO. Photo: Arla Foods.