June 18, 2012


Arla, Mengniu China Dairy signs US$290 million deal

Arla Foods' push into Asia is boosted by an important US$290 million deal with China's top dairy firm, Cofco.


Arla said it will boost its revenues in China by 2016, from last year's US$119 million, by developing into a formal tie-up a seven-year-old joint venture arrangement with China Mengniu Dairy over milk powder sales.


The deal, in which Arla is to invest US$290 million, will see the Nordic-based co-operative take an indirect stake of 6% in Mengniu, and win a place on the board, in return for enhanced access to the Chinese market.


"Arla's products will reach more Chinese consumers to a degree I would consider a breakthrough for the Arla brand in China," Peder Tuborgh, the Arla chief executive, said.


The deal extends a wave of deals by Western dairy groups, both at home, in a desire to achieve cost savings in mature and competitive markets, and abroad, largely in Asia, with the aim of tapping into robust growth prospects.


In the 24 hours before Arla's announcement: New Zealand milk giant Fonterra unveiled the purchase from bankruptcy the milk processing assets of domestically-based New Zealand Dairies; while European diary giant, FrieslandCampina, revealed the purchase of nearly 98% of Philippines-based Alaska Milk.


China, where dairy consumption is growing 10% a year ahead of milk production, and sufficient to lift the country above the US by 2020 as the world's top dairy market, Arla said.


"With the growth rates that are driving the country forwards, now and in the years to come, it is crucial for Arla to gain a solid foothold in the Chinese market," Tuborgh said.


Fonterra itself has identified China has a key market, unveiling in April plans to raise its production of milk in the country by some 20-fold, to 1 billion litres, by 2020.


However, Fonterra has been more cautious over joint ventures since Sanlu Group, in which it had a 43% stake, emerged in 2008 at the centre of a milk-tainting scandal in which some 300,000 Chinese babies became ill, with six dying.


Other agribusiness groups suffering hiccups at Chinese joint ventures including Deere & Co, the US-based tractor giant, whose tie-up with construction equipment group XCG was last year termed a "failed marriage" by the business's general manager, Chen Gang.


Tuborgh said he was "proud" that Hong Kong-listed Mengniu, and state-owned Cofco, its leading shareholder, had chosen Arla "as their strategic business partner in China".


"These agreements will increase our export to China significantly over the coming years," he said, adding that the deal would support payments to Arla's membership, swollen by the tie-ups with the UK's Milk Link and Germany's Milch-Union Hocheifel announced last month.


"It will contribute positively to our co-operative owners' milk price from day one, as we are able to add more value to milk that we, otherwise, would have to sell on the global bulk trading market where the profit is lower historically."