China Mengniu Dairy Company Limited (SEHK: 2319) said on Friday that Arla Foods has bought a 5.9% stake in the company with total investment amounting to some 1.7 billion DKK. The Swedish-Danish cooperative is the largest dairy products producer in Nordic countries and among the largest in the world. The shares of the Chinese company have jumped in early Monday morning trading following the announcement. Arla also announced a deal with leading food and beverage company in China the COFCO Corporation (largest shareholder in Mengniu).
Arla initially teamed with Mengniu back in 2006 when the two companies formed a joint venture. Under the most recent investment, Arla will expand the business relationship to include a wider range of dairy products under Arla brand. The deal is also expected to greatly increase milk exports from Europe to China, where dairy products imports from New Zealand (and to a lesser extent from Central Europe) are currently the most frequently seen. Arla foresees the current 700 million DKK revenues it reaps from China to grow five-fold within a few years. Current sales come nearly exclusively from milk powder sales by the joint venture
The companies managed to whether the storm caused by the melamine scandal in 2008, where the Chinese partner was indicated, relatively unscathed. Chinese dairy industry is however still far off from regaining consumer trust, with latest scandal hitting competitor Yili just days ago. Chinese magazine Global Times quoted local analysts’ saying that Arla can bring in more management expertise but that the quality control will remain in Mengniu’s hands. The local dairy association worried that while the deal brings Mengniu much needed cash it may be negative if it allows foreign brands grab a larger market presence. Arla did say in its own press release, that the companies have agreed to set up a China-Denmark Milk Technology and Cooperation Centre aiming to assist on milk quality, traceability and controlled milk production on farms.
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