Danone plans to sell its Chinese infant formula division to a unit of China Mengniu Dairy, taking a bigger stake in the state-linked milk producer in return as industry growth slows amid the country’s stagnating birth rate.
Paris-based Danone has entered into a memorandum of understanding to sell Dumex China to Yashili International Holdings, and will use the proceeds from the sale to take up more shares in Mengniu as long as it does not trigger a takeover offer, the two Chinese companies said in a combined statement Friday, without disclosing financial details.
The infant formula industry “is not a very attractive business to be in right now; it is not doing well and there is too much competition,” said Robin Yuen, an analyst at RHB OSK Securities Hong Kong Ltd. “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 ($20 billion) in 2015.
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 15 July 15.
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.
Bloomberg News, edited by ESM
