'China remains highly strategic': Danone exits Mengniu JVs, regains control of Dumex infant formula business

By Katy Askew

- Last updated on GMT

Danone says Chinese infant formula category 'highly strategic' / Pic: GettyImages Laikwunfei
Danone says Chinese infant formula category 'highly strategic' / Pic: GettyImages Laikwunfei

Related tags Danone Infant formula China Dumex

French dairy giant Danone has announced plans to take full control of Dumex Danone, the business’ Chinese infant formula brand, while simultaneously exiting its partnerships with Mengniu in the market.

Danone will sell its stakes in local dairies Yashili and Inner Mongolia Dairy Joint Venture, 25% and 20% respectively, to Mengniu. In parallel, Danone will acquire from Yashili 100% of Dumex Baby Food Co Ltd, a Chinese manufacturer of infant milk formula products.

The financial details of the transaction were not disclosed. However, Stifel analysts expect the three transactions to generate a total gain in the region of €60m, assuming proceeds from the two sales of around €200m and approximately €140m in acquisition costs. Cash will be used to deleverage the company.

Danone noted that the deals ‘are not required’ to close simultaneously and added that the earliest closing could take place this year.

“The completion of these transactions will lead to the conclusion of the partnership Danone held with Mengniu over the last few years, following the disposal of Danone’s 9.8% minority stake in Mengniu in 2021,”​ the company said in a statement

China ‘highly strategic’ for infant formula

While Danone is scaling back its presence in the Chinese dairy aisle, the group insisted that China ‘remains highly strategic’.

The Aptimal manufacturer stressed the new arrangement will bolster the company’s position in Chinese infant formula. “Today’s announcement will notably allow the company to further expand its ability to locally manufacture infant milk formula products,”​ Danone said.

According to calculations from Stifel analyst Pascal Boll, infant formula produced in China currently accounts for 50% of its sales in the country. “With the purchase of Dumex, Danone receives two registered recipes (domestic labelled infant formula products) and increases its (local) production capacities by an additional factory in Shanghai. This is in line with the company's strategy to expand domestic labelled products,”​ Boll said.

The transaction sees Dumex return to the Danone stable after a turbulent decade. Danone first took control of Dumex through its acquisition of Numico in 2007. However, when the brand was indirectly associated with the melamine contamination scandal of 2013 and sales plummeted the decision was taken to offload Dumex’s Chinese business to Yashili for €150m in 2015. Now, seven years later, Danone decided to buy it back for an undisclosed sum.

‘Walking the talk’: Portfolio rationalisation in action

Danone’s incoming CEO Antoine de Saint-Affrique has indicated that 10% of Danone’s portfolio could be up for ‘rotation’ as part of the company’s new ‘fix or sell’ approach.

Speaking at Danone’s capital markets day in March this year, the chief executive revealed the company is targeting 3-5% organic sales growth through to 2024, with a reoccurring operating margin higher than 12%.

On underperforming assets, de Saint-Affrique commented: “Either we fix the underperformers or they will go.”

Stifel’s Boll said that this latest announcement is a ‘positive’ move that demonstrates progress on strategic portfolio rationalisation objectives. “The CEO begins to walk the talk. The transaction simplifies the balance sheet, fortifies the strategy in Specialized Nutrition and frees up additional capital.”

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