China Mengniu Dairy Co. is expected to announce it has struck a deal to acquire a controlling stake in local infant formula firm Yashili International Holdings.

The companies suspended trading of their shares on Thursday (13 June) last week. In a regulatory announcement, Mengniu said that the move was “pending the release of an announcement in relation to inside information of the company.”

The move sparked speculation of a merger agreement between the two dairy firms and, on Sunday, reported Mengniu is set to purchase a 51% stake in Yashili.

A source told just-food Mengniu is expected to put out an announcement on the tie-up “later today or tomorrow”. However, neither company could be reached for comment. 

China’s fragmented dairy sector has been rocked by a number of safety scares in recent years, including the 2008 melamine scandal when six babies died from drinking tainted infant formula. 

Since then, the Chinese government has moved to tighten regulation and increase inspections. However, the large number of small companies operating in the sector is viewed as a considerable barrier.

China’s Ministry of Industry and Information Technology is scheduled to hold a meeting of domestic infant formula manufacturers tomorrow, where it is expected that the government will back a drive to speed consolidation in Chinese dairy as it looks to boost safety standards, the report added.

Mengniu has been on something of an expansion drive of late: the group formed a joint venture to manufacture yoghurt with Danone in May and increased its stake in China Modern Dairy to 28% also in that month. Last summer, Arla Foods acquired around a 6% stake in Mengniu as part of its plan to increase its exposure to the Chinese dairy market.

Yashili, which listed in Hong Kong in 2010, in April secured approval from New Zealand’s Overseas Investment Office to build a dairy plant in the country.