Yili ups the ante in milk war with­Meng­niu

China Daily (USA) - - BUSINESS - By BLOOMBERG

In­ner Mon­go­lia Yili In­dus­trial Group Co’s com­pe­ti­tion with Chi­naMeng­niu Dairy Co in the $52 bil­lion Chi­nese dairy mar­ket is go­ing up­scale, cen­ter­ing on a pre­mium, or­ganic seg­ment that makes up just one per­cent of the coun­try’s milk con­sump­tion.

Yili is pay­ing 4.6 bil­lion yuan ($680 mil­lion) for 37 per­cent of China Shengmu Or­ganic Milk Ltd. The Ho­hhot, China-based com­pany could lift its stake fur­ther, giv­ing Yili ma­jor­ity con­trol of the largest Chi­nese or­ganic milk pro­ducer and the only one in the coun­try cur­rently cer­ti­fied to meet Euro­pean stan­dards.

China’s milk com­pa­nies have been strug­gling to win back the trust of cus­tomers af­ter a series of food safety scan­dals, in­clud­ing a 2008 case in­volv­ing melamine­tainted milk that was blamed for the death of in­fants. That’s led Yili and Meng­niu, the coun­try’s top two dairy pro­duc­ers with about 40 per­cent of the mar­ket, to in­tro­duce new prod­ucts and en­ter col­lab­o­ra­tions with over­seas sup­pli­ers and brands.

The ac­qui­si­tion of Hong Kong-listed Shengmu gives Yili an­other plat­form to make deals and con­duct other ac­tiv­i­ties glob­ally, mark­ing “a turn­ing point for their in­ter­na­tional ex­pan­sion,” said Chang Jiang Se­cu­ri­ties Co Ltd an­a­lyst Liu Yuan.

“The ac­qui­si­tion al­lows Yili to se­cure an or­ganic milk sup­ply and to widen dis­tri­bu­tion for the seg­ment,” Liu added.

Yili shares rose as much as 3.1 per­cent to 17.83 yuan in Shang­hai, ex­tend­ing a gain of 7.3 per­cent on Oct 17. The Shang­hai Stock Ex­change Com­pos­ite In­dex was lit­tle changed. In Hong Kong, Meng­niu fell as much as 2 per­cent, while Shengmu has re­quested a tem­po­rary trad­ing halt sinceMon­day.

Yili’s Shengmu deal is the sec­ond-big­gest dairy in­dus­try trans­ac­tion world­wide in the past two years, af­ter Danone’s $10 bil­lion ac­qui­si­tion in July of WhiteWave Foods Co, maker of the best-sell­ing US soy milk brand Silk.

The tiny pro­por­tion of or­ganic milk sold in China com­pares with about 10 per­cent glob­ally, giv­ing the seg­ment a lot of room to grow, ac­cord­ing to Liu. A one-liter packet of Yili-branded pure milk costs 9.7 yuan while Shengmu’s or­ganic pure milk costs 15 yuan for a pack­age of the same size, ac­cord­ing to prices listed on Alibaba Group Hold­ing Ltd’s Tmall e-com­merce web­site.

Yili is plan­ning to raise as much as 9 bil­lion yuan via a pri­vate placement for four in­vest­ments, in­clud­ing buy­ing 2.35 bil­lion shares in Shengmu. That deal could trig­ger a manda­tory of­fer and hold­ers of fur­ther 2.31 bil­lion Shengmu shares are likely to ac­cept, ac­cord­ing to Yili, giv­ing it about 73 per­cent con­trol of the or­ganic milk-maker.

“This helps Yili im­prove its brand eq­uity in the high-end seg­ment, where its ri­valMeng­niu cur­rently has the ad­van­tage,” said Haitong In­ter­na­tional Se­cu­ri­ties an­a­lyst Ni­co­las Wang. “And Yili has a very good dis­tri­bu­tion net­work in­China, which ben­e­fits Shengmu.”

Meng­niu was China’s top dairy com­pany by re­tail sales of prod­ucts such as milk, cheese and yo­gurt un­til 2013, when Yili drew even and then over­took it, ac­cord­ing to Euromon­i­tor In­ter­na­tional.

Meng­niu, also based in Ho­hhot, owns a 25 per­cent stake in China Mod­ern Dairy Hold­ings Ltd, the coun­try’s big­gest raw milk pro­ducer that sup­plies 70 per­cent of the milk for Meng­niu’s pre­mium brand Milk Deluxe, ac­cord­ing toModern Dairy’s web­site.

Meng­niu’s high-end milk prod­ucts “are fairly com­pet­i­tive,” Haitong’s Wang said, adding that China’s dairy in­dus­try has been dom­i­nated by the ri­valry be­tween it and Yili na­tion­ally as the re­main­ing com­pa­nies tend to be re­gion­ally fo­cused.

Yili andMeng­niu may use a mul­ti­pronged strat­egy to widen their lead over smaller ri­vals in China, said re­tail an­a­lyst Thomas Jas­trzab.

“Both will likely com­bine ac­qui­si­tions of pre­mium brands, ex­pand joint ven­tures with multi­na­tion­als and de­velop more dif­fer­en­ti­ated prod­ucts to at­tract af­flu­ent shop­pers,” he said.

GENG GUO­QING / FOR CHINA DAILY

Cus­tomers choose milk prod­ucts at a su­per­mar­ket in Xuchang, He­nan prov­ince.

Newspapers in English

Newspapers from China

© PressReader. All rights reserved.