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Mengniu bids for China's largest raw milk producer

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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 standards".

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 close.

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 chain

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.

Tighter supply

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.

By William Clarke

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