Danone is preparing to sell its stake in the Chinese dairy group Mengniu Dairy Company Limited. The French dairy giant has moved toward disposing of its stake as part of its ongoing portfolio review. 

Danone says that it has reached an agreement with COFCO Dairy Investments Limited (CDI) to convert Danone’s stake in China Mengniu Dairy Company, currently held indirectly, into a direct holding.

Mengniu is a Chinese manufacturing and distribution company of dairy products and ice cream. The company is headquartered in Hohhot, Inner Mongolia, and manufactures dairy products under the Mengniu brand.

Mengniu is listed on the Hong Kong Stock Exchange with a current market capitalization of approximately €18 billion (US$21.6 billion). 

Disposal plans 
Danone first became a shareholder in 2013. This conversion is the first step toward facilitating Danone’s disposal of its stake in Mengniu.

The move is about Danone’s portfolio review, which includes divesting assets that do not contribute to profitable growth.

The conversion process remains subject to regulatory approval and once completed, will result in Danone owning a direct 9.8 percent stake in Mengniu. 

According to the company, a divestiture of Danone’s stake in Mengniu could then follow in 2021 through one or several transactions, depending on market conditions.

Danone’s indirect stake in Mengniu’s share capital currently represents a book value of approximately €850 million (US$1 billion), and had in 2019 a contribution to recurring income from associates of €57 million (US$68.7 million).

Subject to completion and in line with Danone’s disciplined capital allocation, the majority of the expected proceeds will be returned to shareholders through a share buyback program.

When posting Danone’s full-year 20202 results last month, chairman and CEO, Emmanuel Faber, said 2020 was a year marked by the health crisis and honed in the strategy to reinvent Danone “to reconnect with our profitable growth ambition” and boost shareholder value. 

Danone’s plant-based focus
This move also closely follows Danone and Earth Island, maker of Follow Your Heart brands, entering into a share purchase agreement under which Danone will acquire 100 percent of Earth Island shares. The deal is subject to regulatory approvals. 

According to Danone, Earth Island represents a strong cultural fit with the company and provides the French multinational with an opportunity to strengthen its plant-based business.

The share purchase agreement came after Danone had released new plant-based varieties for its Activia and Danio yogurt brands in the Netherlands. Targeting the expanding demographic of flexitarians, the brand targets the shifting consumer taste preferences that lean more toward a mix of plant- and animal-based products. 

This launch was a first for Danone as it was the first time the brand focusing on 100 percent plant-based products.

Eyeing China
Beyond this transaction, the multinational says that China remains highly strategic for Danone. 

The company has a strong commitment to the country through several of its categories, operations and employees.

Last July, Danone invested €100 million (US$120 million) to strengthen Specialized Nutrition in China, further serving Chinese health needs while becoming the biggest B Corp company in Asia. 

Danone’s other investments include the opening of an open-science research center based in Shanghai, the acquisition of local infant milk formula capabilities, and the expansion of capacity to further develop offerings in FSMP (Food for Special Medical Purposes), meaning food for people whose nutritional requirements cannot be met by normal foods.

At the time, Véronique Penchienati-Bosetta, executive vice president, Specialized Nutrition, said: “This investment further demonstrates Danone’s belief in the long-term growth potential of the Infant Milk Formula and medical nutrition market in China and in the power of nutrition to positively impact health trajectories.”

Danone North America has also recently expanded its regenerative farming program in other Danone developments – currently the most comprehensive regenerative agriculture dairy program in the US.