Mengniu Dairy to acquire majority stake in infant formula producer Yashili for $1.6bn

China Mengniu Dairy has entered into an agreement to acquire all of the outstanding shares in infant formula manufacturer Yashili, in a deal worth HK$12.5bn ($1.6bn).

The deal with Yashili is part of Mengniu’s plan to expand its milk powder business and marks the latest effort by China’s milk industry to consolidate the market following several tainted milk scandals that fragmented the sector.

As part of this transaction, Yashili’s controlling shareholders, Zhang International and CA Dairy, a company wholly owned by Carlyle Asia Partners and CAP III Co-investment, have irrevocably undertaken to accept the offer.

Zhang International and CA Dairy together hold a 75.3% stake in Yashili.

Under the agreement, for each Yashili share, the shareholders will have a choice to accept HK$3.5 ($0.45) in cash; or HK$2.82 ($0.36) in cash and a 0.681% stake in a private company set up by Mengniu for the sole purpose of holding shares in Yashili (‘SPV Shares’).

The offer price of HK$3.5 ($0.45) per share represents a premium of approximately 9.4% over the closing price of HK$3.2 per share on 13 June.

The SPV shares will be subject to a three year lock up period and attached certain repurchase option rights.

Mengniu plans to fund the acquisition through external financing.

Following the transaction, which is subject to customary conditions and Mengniu shareholder approval, Zhang International is expected to retain a 10% stake in Yashili, while the remaining 90% will be owned by Mengniu.

Mengniu plans to operate Yashili as an independent operating platform and introduce expertise both from Mengniu and international partners to help Yashili develop into a more internationalised pediatric milk formula brand in the future.

Mengniu chief executive officer Sun Yiping said that the transaction will have enormous strategic significance to the shareholders of both companies.

"With the huge room for growth in China’s pediatric milk formula market, the partnership with Yashili, one of the most successful milk powder brands in China, will greatly strengthen both companies’ business platform to offer consumers with more choices in dairy products that are safe, healthy and of highest quality."

"It will generate important synergies for the development of the two companies, thereby capture the rapid growth of pediatric milk formula market in China," Yiping added.

UBS has been appointed as the lead financial adviser, while HSBC and Standard Chartered have been appointed as joint financial advisers, to assess Mengniu for the transaction.

Yashili, established in 1998, is one of the leading pediatric milk formula producers and retailers in China.

The company, which owns Yashili and Scient milk powder brands, reported income of CNY3.6bn ($592.5m) and a net profit of CNY468m ($75.8m) in 2012.

Mengniu Dairy is primarily involved in manufacturing and distribution of dairy products including liquid milk products, such as UHT milk, milk beverages and yogurt, ice cream and other dairy products such as milk powder.