Danone doubles its stake in Mengniu Dairy Co.

Danone, which currently is the largest yoghurt maker in the world, announced that it reached an agreement with China Mengniu Dairy Co. to pay 486 million Euro (663 million dollars) in order to more than double its stake in the company. The nations increasing demand for dairy products is considered the main reason for this decision.

China Mengniu Dairy Co.s shares were reported to have risen the most in more than eight months to a record after Danone announced that it plans to increase its holding in the company from 4% to 9.9% through a joint venture. China Mengniu Dairy Co. revealed today that new shares will be purchased by Danone at the price of 42.50 Hong Kong dollars each. Still, after the deal is finalized, the state-owned parent company Cofco Corp. will remain the largest shareholder of Mengniu with a stake estimated to 16.3%. Another one of the companys shareholders – Arla Foods, which is based in Denmark, will hold a 5.3% stake.

Danones investment is considered to be able to help it strengthen its presence in China, especially taking into account the fact that four years ago the company decided to sell its stake in a venture with the drinks manufacturer Hangzhou Wahaha Group Co. Currently, Mengniu is also seeking to strengthen its foreign partnerships in order to attract some consumers.

One of the analysts working for BNP Paribas Securities Asia Ltd. – Charlie Chen said for Bloomberg: “China is a very big market for dairy products. You can’t find any other major dairy market in the world that still has such a strong growth potential.”

Mr. Chen also explained that such a share sale is expected to increase the motivation of Danone to help its Chinese partner in product research and development. He also said that the Paris-based company is going to take advantage of the expansion of its yoghurt business on the Chinese market.

The Chief Executive Officer of China Mengniu Dairy Co. – Bessie Wu, said on a conference call today that the investment made by Danone is expected to help Mengniu extend its growth in chilled products such as yoghurt, which is considered to have a huge growth potential on the Chinese market. The companys CEO also explained that Mengniu will benefit from Danones advanced technologies, especially concentrated in quality control, which will help it improve its production efficiencies.

Danones shares were up 0.06% in Paris to trade at EUR50.36 at 08:16 GMT, marking a -0.18% one-year change. According to the Financial Times, the 29 analysts offering 12 month price targets have a median target of EUR53.00, with a high estimate of EUR69.60 and a low estimate of EUR45.00. The median estimate represents a 5.37% increase from the last close of EUR50.30