Update | Mengniu pays HK$6.92 billion to buy out China’s largest dairy herd

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Chinese milk producers including Mengniu had been scooping up dairy farms outside the country ever since a 2008 scandal involving melamine-tainted milk dented Chinese consumers’ confidence. Photo: AFP

Celine Ge

Published: 12:46pm, 5 Jan 2017Updated: 11:01pm, 5 Jan 2017

Mengniu Dairy, the country’s second-largest dairy producer, said it will pay a 3 per cent premium to market price to buy out an associate that controls China’s largest cattle herd, solidifying its grip on milk supplies amid an intensifying battle for market share with larger competitor Inner Mongolia Yili Industrial.

Mengniu will pay HK$6.92 billion (US$892 million) to buy out China Modern Dairy, after an initial HK$1.87 billion bid to raise its stake triggered a mandatory general offer. The initial bid for 965.5 million shares of Modern Dairy was made at HK$1.94 per share, according to a statement to the Hong Kong Stock Exchange.

Mengniu is building up its holdings in Modern Dairy while Yili is on course to take the lead in their race for the palates of discerning Chinese households for untainted and premium dairy. Mengniu and Yili are based in Inner Mongolia’s Hohhot city, the hub of China’s dairy industry.

“Modern Dairy may start to reserve its best-quality milk exclusively for Mengniu” after the takeover, said Song Liang, an independent dairy analyst. Nestlé S.A and Chinese agribusiness New Hope Group have also been major clients of the Chinese raw milk supplier.

The source of milk is a primary and vital concern for Chinese shoppers, as their confidence had been eroded by a scandal involving melamine-tainted baby formula in 2008. Chinese shoppers have been the biggest group of buyers of baby formula, milk powder and dairy products in New Zealand, Australia and other dairy-producing countries for many years, often pushing up prices in local markets by overwhelming supplies with the sheer volume of their purchases.

“High quality and stable raw milk supply is essential to the success of high-end dairy products,” Mengniu said in its statement.

Modern Dairy owns cattle farms with 114,600 cows as of June, the largest herd of the sort in China, giving Mengniu the “highly recognised” production standards to enhance its offerings of safe and premium dairy products, according to the statement.