June 19（Bloomberg) -- China Mengniu Dairy Co. (2319) rose the most in a month in Hong Kong trading after the country’s largest dairy producer offered HK$12.5 billion ($1.6 billion) to buy a local infant-formula maker.
Mengniu rose 6.9 percent to close at HK$28.70, the biggest gain since May 20. Yashili International Holdings Ltd. (1230), the acquisition target, gained 3 percent while the city’s benchmark Hang Seng Index fell 1.1 percent. The two companies resumed trading today after the shares were halted since June 13.
Mengniu agreed to buy 75 percent of Yashili from Chairman Zhang Lidian’s family and Carlyle Group, it said in a statement yesterday. It will also offer to buy the rest of the company for HK$3.50 a share in cash, or about 5 percent more than Yashili’s June 13 closing price.
Yashili should lift Mengniu’s 2014 earnings per share by 7 percent to 17 percent as it will help “rapid expansion into the fast-growing milk powder segment,” Kevin Yin, a Credit Suisse analyst, said in a note to clients today. He maintains an outperform, or buy, rating on Mengniu.
The investment will help Mengniu build a bigger presence in China’s baby-formula market, which is projected to expand more than 70 percent to 133.5 billion yuan ($21.8 billion) by 2015, according to Euromonitor International. The Hohhot, Inner Mongolia-based company is making its third deal in two months after scandals including contaminated milk powder and rat meat sold as mutton fueled demand for safer products and pushed the government to tighten regulations.
“The government is trying to consolidate the industry by backing Mengniu to take control of smaller ones so it can better monitor both upstream and downstream food quality,” Todd Yang, an analyst at Guosen Securities Co., said by phone.
China will push to ensure the safety of baby milk products and draft policies to support deals among producers, the State Council said this month. COFCO, the state-backed agricultural and food industry supplier, owns 19 percent of Mengniu, according to data compiled by Bloomberg.
Yashili sources all its milk from New Zealand and is building a plant there, according to its annual report. It has 1,500 regional distributors across China for its milk powder, it said.
Mengniu listed Yashili’s “high brand recognition, imported premium dairy raw materials and a proprietary formula” among reasons for the acquisition.
Mengniu was among 22 dairy companies found to have sold products containing the chemical melamine in 2008, when tainted powder killed at least six infants in China. Moldy cattle feed led to excessive toxin levels in its milk, Mengniu said in 2011. Since then, the company has run marketing campaigns emphasizing product quality to draw consumers back.
Shareholders will have the option of selling for HK$3.50 in cash or a combination HK$2.82 in cash and 0.681 share in a private company set up by Mengniu. Yashili went public in 2010 at HK$4.20 a share.
Mengniu bought a stake last month in China Modern Dairy Holdings Ltd. (1117), the country’s largest raw-milk producer, to get greater control of milk supplies. Danone (BN), owner of Activia yogurt and Evian water, said last month it will spend about 325 million euros ($435 million) to form a joint venture with Mengniu for yogurt products in China.
The Paris-based company will also have an initial indirect interest of about 4 percent in Mengniu, with the aim of increasing that in the future. The Chinese company formed a strategic partnership with Danish dairy firm Arla Foods in 2012 to improve quality inspection techniques and explore further co-operation.
Founded in 1983, Yashili is about 52 percent owned by Chairman Zhangand his brothers, and 24 percent by Carlyle. The company reported a profit of 468.5 million yuan in 2012, an increase of 53 percent. Its baby-formula brands include Yashily and Scient.
Glenview, Illinois-based Mead Johnson Nutrition Co. (MJN:US) had a 14 percent share in the Chinese milk formula market last year. Hangzhou Beingmate Group Co. was second with a 10 percent share followed by Danone’s 9.2 percent and 7.8 percent by Inner Mongolia Yili Industrial Group.
Yashili ranked seventh with a 4.7 percent share while Mengniu ranked 23rd with 0.2 percent.
“Mengniu and Yashili is the first milestone case under the government’s new push to consolidate China’s infant milk formula industry,” Sun Yiping, Mengniu’s chief executive officer, said on an investor call.
Mengniu sells liquid milk products including UHT milk and yogurt under its namesake brand in China. It also produces ice cream and other dairy products such as cheese and milk powder. The company has the biggest share in China’s drinking milk market, with about 34 percent in 2012, according to Euromonitor International.
China plans to consolidate its milk powder industry and targets creating 10 large companies within two years, each with annual revenue of more than 2 billion yuan, China National Radio reported, citing Gao Fu, an official at the Ministry of Industry and Information.
Chinese consumers’ distrust of local milk has been driving domestic companies to look overseas. Inner Mongolia Yili Industrial Group said in December it plans to invest NZ$214 million ($171 million) in a baby-formula project in New Zealand.
UBS AG is the lead financial adviser, while HSBC Holdings Plc and Standard Chartered Plc. are joint financial advisers to Mengniu.
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