Yashili milk formula products at an expo in Beijing in July. Yashili was ranked eighth in China's milk formula market and had a growth rate of 35.8 percent last year. [Photo / Provided to China Daily]

Largest single domestic deal for baby formula maker valued at $1.6b

China Mengniu Dairy Co, the country's largest dairy producer, has offered to acquire a domestic baby formula maker in a deal valued at about $1.6 billion, to boost its presence in the highly profitable sector of the dairy industry.

The acquisition, which would be the largest single deal in the domestic dairy industry, is expected to lead to further integration in China's milk powder business.

Mengniu is buying a 75 percent stake in Yashili International Holdings Ltd from chairman Zhang Lidian's family and Carlyle Group. It will also offer to buy the rest of the company, giving shareholders the option to sell at HK$3.50 (45 US cents) a share in cash, or about 5 percent more than Yashili's last trading price.

The move will help the Inner Mongolian producer catch up with domestic rivals in the baby milk formula market, which is estimated to be worth more than 50 billion yuan ($8.15 billion), according to Song Liang, a dairy industry analyst at the Distribution Productivity Promotion Center of China Commerce.

Last year, Mengniu's milk formula sales were worth no more than 300 million yuan, only contributing 1.6 percent of its revenue. Yashili, ranked eighth in China's milk formula market, had a growth rate of 35.8 percent last year.

The acquisition would pave the way for integration in the milk formula sector as demand for baby food rises and the government pushes for safer products.

The domestic baby milk formula market has been severely weakened since a milk powder scandal in 2008 and is losing its majority market share in high-end products to foreign rivals.

The acquisition move also indicates the government's efforts to encourage integration in the dairy industry, especially in the milk formula sector, said Jian Aihua, a researcher with CIConsulting, a leading industry research institution.

Industry insiders predict the 127 baby milk formula producers in China will be halved, making it hard for those with a smaller production capacity to survive.

The Ministry of Industry and Information Technology said on Tuesday that integration of the milk powder industry is expected to involve 10 large companies with revenues exceeding 2 billion yuan in two years, accounting for 70 percent of the industry.

The State Council said this month China will take measures to ensure the safety of baby milk products and will draft policies to support mergers and acquisitions among formula producers.

The acquisition would be Mengniu's third this year. French food giant Groupe Danone SA has invested in two joint projects with Mengniu, a move that will help improve Danone's sliding market share in China and restore consumers' confidence in the country's dairy market. Danone will invest about 325 million euros ($417.17 million) in the projects.

Through the deals, Mengniu will probably achieve breakthroughs in the high-end yogurt sector, allowing it to rival domestic competitors.

Two months ago, to secure the quality and safety of its milk supply, Mengniu announced plans to pay HK$3.18 billion, or HK$2.45 per share, to take a controlling stake, or 26.9 percent stake, in the country's largest raw milk producer China Modern Dairy Holding Ltd, which owns 22 dairy farms nationwide.