Danone is taking a 25% stake in Yashili International Holdings, the infant formula business majority owned by Chinese dairy giant Mengniu, in a deal worth almost HK$4.4bn (US$567.4m).

Yashili will issue 1.18 new subscription shares at a value of HK$3.70 each. Following the deal Mengniu will hold 51% of the infant formula manufacturer. The remaining share capital will continue to be traded in Hong Kong.

“Yashili intends to leverage on its strategic partnership with Danone Asia and utilise the net proceeds from the share subscription to expand and strengthen its IMF business,” Mengniu said.

Meanwhile, Danone said the group would use the alliance to  grow Yashili and “develop a wide range of products that meet the very highest standards in this category”.

“Through this new expanded alliance, Danone and Mengniu will leverage Danone’s world-leading technology and know-how in the IMF industry and Mengniu’s market experience in the PRC to grow Yashili and develop a wide range of products that meet the very highest standards in the category,” Danone said.

Under the deal, Danone will recommend candidates to serve as Yashili CEO. Danone and Mengniu will also “study the possibility” of an equity investment in Danone’s subsidiary, Dumex China, with a “comparable minority stake”.

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By GlobalData

This transaction extends the scope of the strategic alliance in fresh dairy products first established in 2013 between Mengniu and Danone.

In its most recent financial update, Mengniu revealed the contribution of Yashili had helped strengthen the dairy firm’s margin profile. However, the performance of the infant formula manufacturer was put under the microscope when the group revealed revenue and net profit were down by around one-third in the first half of the year.

For its part, Danone has been grappling with challenges in its Asian infant formula business which has seen something of a rebound following last year’s consumer facing recall that was sparked by the Fonterra botulism scare. The deal increases Danone’s exposure to mass-market infant formula brands and extends its reach beyond its current premium leaning.