Danone, Mengniu Dairy to boost dairy development in China

French dairy firm Danone has entered into an agreement with China Mengniu Dairy to invest €325m in two deals, in order to take advantage of increasing demand for internationally-branded milk and yoghurt.

The development marks a comeback for the French giant in China, where recent scandals have had a significant impact on confidence in food safety.

The cooperation will allow Mengniu to utilise Danone’s product innovation and management capability in the fresh dairy category.

Under the terms of the first agreement, Danone and China Oil and Foodstuffs Corporation (COFCO), the state-owned leading food company in China and the largest shareholder of Mengniu, will form a joint-venture.

COFCO will sell 148,014,022 shares in China Mengniu to the joint venture in which COFCO and Danone will own 51% and 49% stakes respectively.

COFCO chairman Frank Ning said, "I hope COFCO and Danone will take today’s cooperation in dairy sector as a starting point, and explore more cooperation opportunities in the future by leveraging respective advantages in marketing, channels, product and management, in order to jointly develop the Chinese market."

Following the transaction, COFCO will continue to be the single largest shareholder in Mengniu.

Danone will become a strategic shareholder in Mengniu, holding an indirect share of about 4% initially, with an aim to increase the stake based on market conditions in the future.

As part of the second agreement, Danone and Mengniu will establish a joint venture for the production and sale of chilled yoghurt products in China.

The joint venture will combine both companies’ assets in this category, and will have net sales of about €500m and 13 factories across China. It is expected to have a market share of about 21%.

It will benefit from the complementarity of Danone and Mengniu brands and will achieve synergies by taking advantage of Danone’s expertise in quality and product innovation, while fully leveraging Mengniu’s leadership and distribution capability in China’s yoghurt category.

Danone will own 20% of the new joint-venture in China, while Mengniu will own the remaining 80%.

The transactions, which are subject to the approval of the relevant authorities, are expected to be finalised in the coming months.

Danone stated that it will appoint senior executives to join the top management team, who will assist Mengniu in further strengthening its management capability.

Danone will utilise its BIO (Activia) brand in order to put the new joint venture in a position to build strong leadership in the active health sector.

Danone chairman and CEO Franck Riboud said that the combination of Danone, COFCO and Mengniu will unlock the potential of the fresh dairy products category in China.

"Backed by COFCO’s extensive expertise in the Chinese food industry and by Mengniu’s nation-wide leading platform in the dairy sector, our brands will benefit from significantly wider reach to the largest number of Chinese consumers," Riboud added.

Danone has been seeking to expand its presence in China for years.

The French giant withdrew a yoghurt-making partnership deal with Mengniu five years ago after it failed to receive government approval and noted that progress on the deal was slower than it had expected.

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Image: Danone stated that the new joint ventures with COFCO and Mengniu will unlock the potential of the fresh dairy products category in China. Photo courtesy of Alessandro Paiva.