Danone bolsters China presence with $550 mln baby milk deal (updated)

Yashili International Holdings

31/10/2014 12:25

* Buys 25 pct stake in Yashili for around $550 mln 
    * Danone Dumex brand had setbacks in China last year 
    * Danone shares up almost 3 pct, analysts welcome srategic 
move 
    * Deal seen reducing prospects of large M&A -Kepler 
 
 (Writes through with more details, adds Paris dateline) 
    By Adam Jourdan and Dominique Vidalon 
    SHANGHAI/PARIS, Oct 31 (Reuters) - France's Danone 
 DANO.PA , battling local rivals for a larger share of China's 
booming baby milk market, has invested $550 million in formula 
maker Yashili International Holdings, further reducing its 
dependence on slow growth Europe. 
    The deal strengthens Danone's ties with China's top dairy 
firm -- Yashili's  1230.HK  largest investor -- and comes as the 
French firm's key Dumex baby nutrition brand seeks to win back 
consumers after accusations of high prices, bribery and tainted 
milk scares last year.  ID:nL3N0LP2S3  
    The 25 percent stake purchase is also the first major 
investment since Danone split its chairman's dual roles in 
September, handing the CEO job to Emmanuel Faber. 
    Kepler Cheuvreux analyst Jon Cox said the deal "made sense" 
and limited the chances of a large value-destroying deal in the 
short term: "(It) reduces the chance of big bang M&A, say 
involving (U.S. firm) Mead Johnson, which the market was 
concerned about." 
    Sources familiar with the matter told Reuters earlier this 
month that Danone wanted to pursue a takeover of U.S. formula 
maker Mead Johnson Nutrition Group  MJN.N .  ID:nL6N0SC4MZ  
    Analysts have also speculated Danone might sell its Medical 
Nutrition business and push deeper into markets like China and 
Africa with acquisitions.  ID:nL6N0M33YZ   ID:nL6N0SC4FG  
    At 1145 GMT, Danone shares were up 2.8 percent at 54.2 
euros, outperforming the broader European sector  .SX3P , which 
gained 1.5 percent on the day. 
     
    CHINA PUSH 
    China is Danone's fourth-largest market, accounting for 
around 7 percent of its group sales. 
    But global dairy firms such as Danone, traditionally 
dominant in the lucrative premium end of the milk powder sector, 
are having to fend off increasingly savvy local brands. Beijing 
is also pushing consolidation to strengthen domestic players. 
    Acquiring the stake in Yashili strengthens Danone's links to 
the Chinese firm's largest shareholder and the country's biggest 
dairy firm, China Mengniu Dairy Co Ltd  2319.HK , whose stake 
will be diluted as a result of the deal. Danone owns a stake of 
around 10 percent in Mengniu, according to a February statement. 
    The CM-CIC Securities brokerage said in a note the deal was 
"an excellent strategic opportunity" for Danone. 
    "Having secured its milk supply in China with Mengniu, 
Danone is beefing up its infant formula division, which will 
help it counter Nestle's ambitions," it said. 
    Danone, the world No. 2 in baby food, lost out to market 
leader Nestle  NESN.VX  in a battle for U.S. drugmaker Pfizer's 
baby food brands in 2012, which gave Nestle dominance of 
emerging markets, including China. 
    Yashili specialises in infant milk formula products, making 
it one of the better known brands in a market that Euromonitor 
estimates will double in size against last year to hit $31 
billion by 2017. 
    The French firm said it would pay HK$3.7 per share in a 
private placement deal. Mengniu will see its holding diluted to 
51.04 percent from 68.05 percent. 
    Mengniu bought Yashili in a deal worth about HK$12.5 billion 
($1.6 billion) last year to expand its milk powder business.  
    Kepler Cheuvreux's Cox said the Yashili deal could also pave 
the way for Mengniu to take a stake in Danone's Dumex business. 
    Danone holds around six percent of China's milk powder 
market, according to Euromonitor, down from 10.2 percent in 
2009. It lags rivals Nestle SA, Mead Johnson and local firms 
Beingmate Baby & Child Food Co Ltd  002570.SZ  and Biostime 
International Holdings Ltd  1112.HK . 
    Yashili's shares, suspended since Oct. 29, jumped 8.5 
percent to hit a five-month high on Friday, before reversing 
gains to trade down 9 percent at HK$2.88.  
  (1 US dollar = 0.7934 euro) 
(1 US dollar = 7.7549 Hong Kong dollar) 
 
 (Additional reporting by Donny Kwok in Hong Kong; Editing by 
Edwina Gibbs and Clara Ferreira Marques) 
 ((adam.jourdan@thomsonreuters.com; +86 21 6104 1778; Reuters 
Messaging: adam.jourdan.thomsonreuters.com@reuters.net)) 
 
Keywords: YASHILI DANONE/M&A