On January 4, 2017, Mengniu entered into a sale and purchase agreement with the company Success Dairy II, for the purchase of its China Modern Dairy shares, with Mengniu conditionally agreeing to acquire the shares for $241.5m.
China Mengniu already owned 25.4% of China Modern Dairy following a deal in May 2013, and the acquisition would increase the stake in the company to 39.9%.
Hong Kong’s regulatory rules mean that when a company’s shares cross the 30% mark, the stakeholder has to make an offer for the remaining shares, which Mengniu Dairy has done.
It has subsequently made an offer to buy the remaining shares it does not already own in Modern Dairy for $826m, taking its total stake to 91%, as 9% of shareholders have said they will not accept the offer.
Safe milk supply
As of June 30, 2016, China Modern Dairy, the largest dairy farming company in terms of herd size and the largest raw milk producer in China, had 27 farms in operation in China with approximately 220,493 dairy cows in total. Its farms are situated across China.
According to a statement from Mengniu, China Modern Dairy’s profits before tax dropped from RMB770m ($111m) in 2014, to RMB355m ($51m) in 2015. In the first half of 2016, the company is expected to show a RMB590m ($85m) loss.
The move is an attempt by China’s second biggest dairy company to secure a safe and stable supply of raw milk.
Mengniu said the deal would strengthen its positioning in the high-end dairy products market, and support the development of low temperature dairy products.
Mengniu said that with its large scale presence throughout China, China Modern Dairy has excellent geographical advantages given its farms are in close proximity to key dairy consumption regions.
The company added that the deal allows Mengniu to become an integrated market leader with the ability to control the entire value chain and further enhance operational efficiency.
China Modern Dairy has been selling raw milk to Mengniu since 2006 and in October 2008, the supply relationship was further formalized when Mengniu entered into a 10-year raw milk supply off-take agreement with China Modern Dairy.
Mengniu said that China Modern Dairy is a pioneer in domestic large-scale farming and its expertise in farming and quality management will help Mengniu Group in quality control of raw milk purchased from smaller dairy farmers, which will further improve Mengniu’s operational capabilities.
Other than proposed changes to the China Modern Dairy board, Mengniu said it has no intention to make changes to management or to terminate the employment of any employee or other personnel of China Modern dairy.