Chinese dairy giant China Mengniu moved to tighten control
on its milk supply, with a takeover bid for China Modern Dairy, the country's
largest raw milk producer.
China Mengniu said the deal would help it secure stable
supplies of "high quality milk," noting China Modern Dairy's "stringent quality
Mengniu's move to secure its supply chain follows a profit warning,
caused in part by the need to sell-off milk powder inventories in order to
increase working capital.
Bidding for control
China Mengniu Dairy upped its stake in CMD to some 40%, with
the purchase of 965.47m shares at HK$1.94, a premium of 7% to their Wednesday
Under Hong Kong corporate rules, this compelled the Mengniu
to tender for the remaining shares, which it has done at the same price.
Mengniu expects to spend another HK$6.4bn, boosting its
stake in CMD to 91%.
The filing from Mengniu shows that some shareholders, including
CMD chief executive Lina Gao, will not sell their stocks, meaning that the
company will remain floated in Hong Kong.
A significant stake in CMD is currently held by Kohlberg Kravis
Roberts, a US activist investor firm, with a history of leveraged buyouts.
Move up the value
Mengniu said the deal would allow it to focus on "premium products
with higher value-add".
The company also flagged the proximity of some of CMD's
farms to Mengniu's facilities, which would allow the retail of refrigerated
dairy products, currently a minor part of the Chinese dairy market.
Last month Mengniu issued a warning that its 2016 results would
show a "substantial loss".
The company chalked up the loss to poor performance in from Yashili,
a formula maker owned by Mengniu, as well as another subsidiary.
But it also noted that a loss was incurred in selling off
some of its excessive milk powder inventories at market prices, in a bid to
improve working capital management.
Chinese milk production is believed to have tightened in
2016, as the industry reorganises around big producers such as CMD.
Last month Rabobank noted in China "off-takers' interest in
buying more milk at the farmgate level".
"This suggests tightening supply elsewhere, particularly with
small and medium-size farms exiting quickly over the past two years."
China Modern Dairy shares in Hong Kong are currently trading
at HK$1.91, up 5.5% on the day.