Mengniu Dairy to acquire additional stake in China Modern Dairy

China Mengniu Dairy has entered into an agreement to increase its stake in China’s unpasteurised milk producer Modern Dairy from 1% to 28%, in a deal estimated to be worth HKD3.18bn ($410m).

Under the terms of the deal, Mengniu Dairy will pay HKD2.45 ($0.31) per share to Advanced Dairy and Crystal Dairy for the stake in Modern Dairy.

Following the completion of the transaction, Mengniu Dairy will become the single largest shareholder with an approximately 28% stake.

Mengniu chief executive officer Sun Yiping said the increase of Mengniu’s stake in Modern Dairy is intended to secure both quality and quantity of raw milk sources, as well as to further capitalise on its competitive edge in high-end milk source.

"Meanwhile, accelerating and expanding investments in quality farms will allow Mengniu to establish a safer and more stable value chain in the dairy sector, to provide healthier and better quality dairy products to consumers," Yiping added.

The transaction brings together the two leading dairy companies in China at a time when the domestic industry is struggling to regain consumer confidence in the safety of its products following a series of scandals in the country in 2008 and 2011.

The deal is expected to strengthen the cooperation between Mengniu Dairy and Modern Dairy, as well as provide Mengniu with a stable source of premium milk supply.

Advanced Dairy and Crystal Dairy are controlled by private equity investors KKR and CDH respectively, which acquired stakes in Modern Dairy following the milk controversy in 2008, in which 22 dairy companies including Mengniu were implicated for using industrial chemical melamine in milk and infant formula.

Following the acquisition, KKR will own about 3.6% of Modern Dairy, while CDH will have a 1.5% share.

Modern Dairy, which is a leading dairy farming company and raw milk producer in China, supplies a major portion of its unpasteurised milk to Mengniu Dairy.

In 2008, Modern Dairy entered into an agreement to sell all of its raw milk to Mengniu at a negotiated price for ten years and the agreement will extend for another ten years upon expiration.

Mengniu Dairy is primarily involved in manufacturing and distribution of dairy products including liquid milk products, such as UHT milk, milk beverages and yoghurt, ice cream and other dairy products such as milk powder.

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Image: The deal is expected to strengthen the cooperation between Mengniu Dairy and Modern Dairy and provide Mengniu with a stable source of premium milk supply. Photo courtesy of Alessandro Paiva.