May 21, 2013

The deal involves the creation of a joint venture between Danone and state-owned China National Cereals, Oils and Foodstuffs Corporation (COFCO), Mengniu's biggest shareholder.

Danone will get a seat on Mengniu's board and a 4.1% holding, which it wants to increase to 10%. This may cost the French firm another €300 million (US$386.41 million), analysts say.

Danone will also set up a joint venture with Mengniu for the production and sales of yoghurt in China. Danone will own 20% of the business, which aims for a fifth of the market.

Analysts estimate the share capital deal cost Danone €180 million (US$231.84 million), while the yoghurt joint venture cost €145 million (US$186.76 million).

Danone estimates the Chinese yoghurt market - currently worth €2 billion (US$2.58 billion) in annual sales - will more than double in the next five years. Danone sells Activia yogurt under the brand Bio and Dumex infant formula in China.

Coming after a scandal in 2008 over melamine-laced milk, in which six infants died and 300,000 fell ill in China, Danone's partnership with Mengniu is expected to ease concerns over quality because foreign brands are perceived as offering higher safety standards.

On the hunt for growth beyond a stagnant Europe, Danone and its rivals, such as Nestle and Unilever, have found it difficult to sell consumer goods in the world's second largest economy and most populous country, where the market is dominated by local firms.

Danone's previous attempts have misfired. Five years ago it walked away from a yoghurt joint venture with Mengniu, which is China's top milk producer. Soon afterwards, it suffered a bitter commercial dispute with soft drinks firm Hangzhou Wahaha Group.

Danone is the world's largest yoghurt maker, with brands such as Actimel and Activia. And China is Danone's fourth biggest market after Russia, France and the US, and contributes 6% of its total revenue.