Back-again Danone prepares for China dairy threesome

Under the terms of the first agreement, Danone will invest €325m (US$417m) in Mengniu. The move will mark a return for the French dairy major in China, and provide a fillip for Mengniu, which is desperate to restore confidence in its milk products after being hit twice by accusations that it sold tainted milk. 

The agreement will also play into Danone’s hands as it will finally allow the company to break into a growing market in the face of falling dairy sales in Europe. The French company had previously attempted to enter China—to form a yoghurt-making partnership with Mengniu five years ago—but pulled out after failing to gain government approval.

State-owned Cofco will own a majority stake in the newly formed company, which 49% being taken by Danone, which will also buy an indirect interest in Mengniu of around 4% at the initial stage. The company revealed in a statement that it plans to increase its interest in Mengniu based on market conditions in the future.

Framework agreement​

Moreover, Danone and Mengniu also signed a framework agreement to establish a joint-venture for the production and sales of chilled yogurt products in China, combining their respective assets in this category for total 2012 pro-forma net sales of about €500m, with an estimated market share around 21% and 13 factories across China. Danone will own 20% and Mengniu 80% of the new joint-venture.

The partnership will help Mengniu leverage Danone’s product innovation and management capability in the Fresh Dairy category, with Danone’s BIO (Activia) brand coming to the fore. The Chinese company accounted for 16.8% of China's yoghurt market in 2012, up from 16.5% in 2011 and 15.9% the year before, according to Euromonitor. The research company expects the market to grow to RMB53.9bn (US$8.8 billion) this year and to RMB71.6bn by 2015—more than double its value just three years ago.

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

Arla partnership safe​

Cofco and Mengniu’s existing strategic partnership with Arla Foods is unaffected by the agreement. “Arla welcomes Danone as Mengniu’s partner in the locally produced chilled yogurt category​,” said Finn S. Hansen, Arla’s executive vice-president and a member of Mengniu’s board of directors. “We are confident that Danone’s engagement in Mengniu will increase consumers’ trust in locally produced dairy products for the benefit of all players in the Chinese dairy market​.”

According to Cofco’s chairman, Frank Ning, the company has a responsibility to develop dairy products in China, not least through its position as the country’s largest state-owned food company. “I hope Cofco and Danone will take today’s co-operation in dairy sector as a starting point, and explore more opportunities in the future... in order to jointly develop the Chinese market​.”