Mengniu buys Yashili for $1.5b

Mengniu Dairy Co will acquire smaller rival Yashili International Holding for $1.47 billion, the largest merger in the domestic dairy industry, as it seeks to boost its milk powder business.

The all-cash offer is a 9.4 percent premium over Yashili's closing share price of HK$3.20 (41 US cents) last Thursday on the Hong Kong stock exchange. A separate offer involving cash plus a share-swap is valued at 912 million yuan and covers 1.2 billion shares.

The shares of both companies have been suspended from trading since last Thursday after they said in separate statements that an announcement is pending, which may contain inside information.

"Mengniu is eager to boost its yogurt and milk powder businesses in order to reduce reliance on liquid milk products and raise profitability," said Jian Aihua, a food industry analyst with market research company CIConsulting.

Liquid milk accounted for 89.6 percent of Mengniu's revenue last year, while milk powder made up only 1.6 percent.

The partnership will allow the two companies to leverage capabilities and resources in product offering, innovation, sourcing and distribution channel development, according to a joint filing to the Hong Kong stock exchange.

Yashili is 52 percent owned by chairman Zhang Lidian and his brothers, and 24 percent by the Carlyle Group.

Hohhot, Inner Mongolia-based Mengniu has unveiled a string of investments this year and collaboration with French food group Danone as it seeks to consolidate its market position.

Mengniu said last month it will pay US$409 million to raise its stake in raw milk provider Modern Dairy to 28 percent to gain greater control of milk supplies.

Domestic demand for baby food has been surging in recent years, especially after a tainted milk scandal in 2008 affected domestic dairy companies including Mengniu and Yili.