Oct 31, 2014 03:54 PM EDT
Danone Bolsters China Presence With $550 Million Baby Milk Deal

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.

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).

Analysts have also speculated Danone might sell its Medical Nutrition business and push deeper into markets like China and Africa with acquisitions.

At 7.45 a.m. EDT, 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 specializes 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.

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