Inner Mongolia Yili Industrial Group has agreed to pay CNY 4.6 billion ($680 million) for a 37% stake in China Shengmu Organic Milk, the only dairy company in the country to produce certified European-standard organic milk.
Yili plans to raise the equivalent of $1.33 billion through a non-public offering to help support its deal for Shengmu – as well as additional investments of around CNY 1 billion ($150 million) in a new operations centre, CNY 538 million ($79 million) in a dairy production line in New Zealand, and about CNY 2.5 billion ($370 million) in a project to improve the quality of dairy products in mainland China.
Shares in Yili rose 7.3% on the back of the news. Shengmu’s share price has risen by 33% so far this year, but the Hong Kong-listed company requested a halt in its trading this week to announce the terms of the agreement with Yili.
The move ‘could help the country’s leading dairy producer win over increasingly affluent customers seeking healthier food options’, according to analysts at Bloomberg.
It represents Yili’s intention to compete for position with Mengniu in the global organic market.
The investment in a new dairy production line in New Zealand is particularly telling: with confidence in the Chinese infant formula market and in Chinese dairy generally still struggling to recover from the 2008 melamine crisis, the move will allow Yili to capitalise on consumer perceptions of New Zealand and Australian-made products in China.
The company invested just over CNY 1 billion in setting up an Oceanic production base in 2014, and last October GEA built a 50,000-ton infant formula plant south of Auckland to supply rival firm Yashili.
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