In a document filed with the Stock Exchange of Hong Kong last week, Mengniu confirmed that it has entered into an agreement with two China Modern Dairy stakeholders - Advanced Dairy Company and Crystal Dairy Holdings – to acquire around 1.3m shares in the company.
Once completed, the HK$3.18bn ($410m, €315m) deal will see Mengniu’s stake in China Modern Dairy increase from just over 1% to 27.99%.
Mengniu considers China Modern Dairy – Mengniu’s largest supplier of raw milk - a “long-term partner.” According to Mengniu, the investment is “consistent with its strategy in enhancing the quality of its milk sources and securing long-term premium milk supply.”
“Secure both quality and quantity of raw milk”
The Chinese dairy industry has seen its reputation smeared in recent years by a series of quality and safety scandals. Resulting public concern has turned many consumers off domestically-manufactured dairy products and on to ‘safer’ international brands.
Last year, in an attempt to better assure the quality of its milk supply and curb consumer fears, Mengniu announced plans to increase its sourcing of raw milk from large-scale farms and ranches to 100% by 2015.
“The source of milk is the first gatekeeper of quality control for dairy enterprises. Enhancing supply of quality milk sources has been the Group’s key focus in recent years,” said Mengniu’s Stock Exchange of Hong Kong filing.
Commenting on the agreement, Mengniu CEO, Sun Yiping, heralded the deal as an opportunity for the company to further its quality assurance efforts.
“The increase of Mengniu’s stake in Modern Dairy is to secure both quality and quantity of raw milk sources, as well as to further capitalise on our competitive edge in high-end milk source. Meanwhile, accelerating and expanding investments in quality farms will allow Mengniu to establish a safer and more stable value chain in the dairy sector to provide healthier and better quality dairy products to consumers,” said Yiping.
“Possible disposal of certain assets”
Last month, China Modern Dairy was forced to play down rumours of a takeover by “a third party” assumed to be Mengniu. It did, however, confirm that talks were ongoing with the unnamed company is regards to the “possible disposal of certain assets.”
Over the last year, China Modern Dairy and Mengniu have been forced to dismiss rumours that the latter was preparing to acquire the raw milk producer on several occasions.