Danone swaps Dumex China unit for deeper ties with domestic dairy giant (updated)

Yashili International Holdings

24/07/2015 05:56

* Plans to sell Dumex business to part-owned Yashili 
    * Dumex sales had plunged after series of food scares 
    * French firm to raise 9.9 pct stake in dairy giant Mengniu 
    * Competition rising in China's $20 bln formula market 
 
 (Recasts, adds Danone statement) 
    By Donny Kwok and Adam Jourdan 
    HONG KONG/SHANGHAI, July 24 (Reuters) - France's Danone SA 
 DANO.PA  is pulling the plug on efforts to revive its flagship 
Dumex infant formula unit in China on its own, swapping a 
business ravaged by food scares for a bigger stake in a domestic 
dairy giant as competition heats up in the world's biggest 
market for formula milk. 
    The French food supplier said on Friday it has struck a 
"preliminary agreement" to sell its Dumex unit, once its top 
formula brand in China, to Yashili International Holdings Ltd 
 1230.HK . In return Danone will deepen ties with one of the 
country's biggest dairy firms, raising its 9.9 percent stake in 
China Mengniu Dairy Co Ltd  2319.HK , Yashili's indirect parent. 
    The move reflects a growing challenge for international 
firms in China's fiercely competitive $20 billion infant formula 
market. Dumex saw its sales plunge after a series of scares in 
the last few years. 
    "That had a strong impact on consumers' trust in the brand. 
It really damaged them in terms of reputation and sales. This 
sort of marks Danone getting out," said James Roy, 
Shanghai-based associate principal at China Market Research. 
    Danone didn't disclose a value for the Dumex business, and 
didn't say by how much it will raise its holding in Mengniu, 
worth nearly $10 billion by market value. The French firm, which 
reports first-half earnings later on Friday, spent $665 million 
to up its stake in Mengniu last year, and paid $550 million more 
for a 25 percent stake in Yashili itself.  ID:nL4N0SQ0EM  
    While Yashili is its main formula business, Mengniu has 
operations in yoghurt, liquid milk and ice cream - which could 
help Danone expand its China business outside infant formula.    
    In February, Danone's Chief Executive Officer Emmanuel Faber 
said the firm was "reshaping the future of Danone in China" 
around its alliance with Mengniu. Dumex wasn't likely to 
contribute much to China growth in 2015, he said. 
    Danone is the number three player with 8.1 percent share of 
China's milk formula market, where it has other formula brands 
including Nutrilon. The overall market is set to double in size 
by 2020, market research firm Euromonitor said. 
    Beijing is putting pressure on firms to increase domestic 
production, creating an incentive to tie-up with local partners, 
one industry executive said recently. Abbott Laboratories 
 ABT.N  has a new formula plant near Shanghai while New Zealand 
dairy giant Fonterra  FCG.NZ  has invested in China farms. 
    The deal will also help Yashili boost its reputation with 
domestic consumers who see international ties as a mark of 
quality and safety. Danone and Yashili will collaborate on a 
manufacturing facility in New Zealand, the Chinese firm said. 
 
($1 = 6.2096 Chinese yuan renminbi) 
 
 (Editing by Kenneth Maxwell) 
 ((donny.kwok@thomsonreuters.com; +852 2843 6470; Reuters 
Messaging: donny.kwok.reuters.com@reuters.net)) 
 
Keywords: YASHILI DANONE/