Danone gives up Dumex China for larger Mengniu stake

This is written by Daryl Loo and Annie Lee of Bloomberg

Beijing: Danone plans to sell the Dumex Chinese infant formula brand to a unit of China Mengniu Dairy Co. amid a downturn in demand for locally-made baby-food in that market.

Danone has agreed to sell Dumex to Yashili International Holdings Ltd., and will use the proceeds from the sale to take up more shares in Mengniu, a state-linked milk producer, the two Chinese companies said in a combined statement yesterday. 

The Paris-based food company separately said it took an impairment charge of 398 million euros (US$437 million) as it revised Dumex’s sales prospects lower.

The infant formula industry “is not a very attractive business to be in right now,” said Robin Yuen, an analyst at RHB OSK Securities Hong Kong Ltd. “It is not doing well and there’s too much competition. Mengniu can run the business better than Danone can in China, due to their distribution network.”

The deal would allow Danone to tap into a company whose revenue almost doubled in the past five years. It would also turn Mengniu into one of China’s largest baby milk powder sellers, in a market that Euromonitor forecast will be worth 122.1 billion yuan (or US$20 billion) in 2015. 

Danone expects to boost its 9.9 per cent stake in Mengniu by about 2 percentage points, chief financial officer Cecile Cabanis said in a telephone call with reporters from Paris.

Chinese consumers are increasingly buying foreign-made infant formula from online sites amid concern about the safety of locally-produced baby food after past food scares. Demand for foreign-made formula from China contributed to a double-digit percentage increase in Danone’s sales in Europe, the company said yesterday.

Danone, the world’s biggest yogurt maker, also said first-half adjusted operating profit rose 17 per cent, meeting analysts’ estimates, as second-quarter like-for-like sales gained 4.6 per cent, exceeding the 4.3 per cent average estimate.

Shares of Danone fell 0.7 per cent to 61.74 euros at 9:04am in Paris. Yashili shares rose 2.6 per cent to HK$2.33 in Hong Kong trading, while Mengniu climbed 0.3 per cent.

China’s infant milk formula industry “has long passed its prime moment when brands could make good profits easily,” and industry consolidation is expected, Morgan Stanley analysts led by Dustin Wei wrote in a July 15 report.

China’s 2008 to 2014 “mini baby boom” has ended because of lower numbers of women of childbearing age, and the Chinese’s decreasing or delayed willingness to have children despite the government’s easing of its one-child policy. 

The fertility rate rose to 1.67 in 2013 from 1.63 in 2008 per Chinese woman, according to the latest available World Bank data.

Yashili and Beingmate Baby and Child Food Co. are expected to be market consolidators, even as e-commerce emerges as a sales channel allowing strong brands to win share, Morgan Stanley analysts wrote. They estimate a 6-8 per cent growth in the industry this year before dropping to 2-4 per cent in 2017-2018.

Danone had a 8.1 per cent market share in 2014, behind Nestle SA’s 13.4 per cent and Mead Johnson Nutrition Co.’s 10.1 per cent, according to Euromonitor. Mengniu is ranked eighth with 4.1 per cent.

Guangzhou, China-based Biostime International Holdings Inc. said Thursday first-half profit will probably plunge 36 per cent as it discounted older versions of infant formula to make way for new products.

This latest move is a follow through of a shift in strategy for Danone, giving up attempts to go it alone with Dumex in the world’s most populous country after a 2013 food scare hit sales and dented group profits.

In October 2014, Danone bought a 25 per cent in Yashili, after agreeing to pay HK$4.39 billion to Mengniu. As a result of the sale, Mengniu's grip on Yashili was pared down from 68 per cent to 51 per cent.

Mengniu is controlled by state-owned Cofco Corp, China’s largest food company. In addition to infant formula, it produces yoghurt, liquid milk and ice cream. Two months ago, Mengniu had invited investment banks to submit proposals for a possible group restructuring.

Danone last year paid 486 million euros to raise its stake in Mengniu to 9.9 per cent from 4 per cent through a joint venture with the parent called Cofco Dairy Investments. The French company’s latest deal to boost its Mengniu stake to 12 per cent will also be through this joint venture, according to yesterday’s statement.