Dairy companies Fonterra Co-operative Group and Shijiazhuang San Lu Group announced today (Friday) that they have reached a deal under which Fonterra will acquire a 43% stake in the Chinese company for RMB864m (US$107m).

The two companies initialled documents at a special ceremony at the prestigious Diao Yu Tai State Guest House in Beijing today, they said in an announcement to the financial markets.

The agreement, which is subject to approval from Chinese regulatory authorities, represents one of the largest-ever investments by a foreign dairy company in China.

The overall San Lu Group's business ranges from dairy farming to processing as well as new product development through its own research and development. San Lu's overall sales in 2005 are expected to be RMB 7.5bn.

Shijiazhuang San Lu Group is a leading dairy company in China, producing a wide range of product lines in the three main dairy categories - powdered milk, liquid milk and fresh dairy. Shijiazhuang San Lu Group's main products are nutritional milk powders. It has maintained the number 1 position in both production and sales of blended powders nationally for 12 consecutive years.

Shijiazhuang San Lu Group is renowned for the quality of its products. Its milk powders and nutritional milks have been granted the status of national products and "Renowned Chinese Brand Products".

New Zealand-headquartered Fonterra is the largest marketer of dairy ingredients in the world, exporting dairy ingredients to 120 countries. Fonterra has total revenues of NZ$12.3bn (US$8.5bn) and is world-renowned for the production, processing and sales of dairy products. Fonterra exports more than 90% of its total production.

San Lu chairwoman Tian Wenhua said: "Next year is San Lu's 50th birthday. After the continuous endeavor of several generations, Shijiazhuang San Lu Group brand has become a famous Chinese brand. We have accumulated extensive experience in new product R&D, operational management and sales and marketing, and maintained a robust and sustainable growth momentum for many years.

"Fonterra is an acknowledged leader in dairy production with extensive management experience, world class R&D teams and advanced marketing skills," she said.

"I believe the co-operation between Shijiazhuang San Lu Group and Fonterra is significant to the development of the Chinese and global dairy industry," she said. "It signals that Shijiazhuang San Lu Group has taken the first crucial step towards its objective to aim at world class levels and develop Shijiazhuang San Lu Group into a global leader in the dairy industry in line with the requirements of the international market with expanded market share and increased strength."

Fonterra chief executive officer Mr Andrew Ferrier said the investment reflected Fonterra's confidence in the future of the dairy industry in China.

"Over the past 20 years, Fonterra has been the number one exporter of dairy ingredients to China," he said. We have been impressed by the spectacular growth in consumer demand for dairy products in China as well as the way Shijiazhuang San Lu Group has grown strongly to meet this demand," said Ferrier.

Fonterra brands managing director Sanjay Khosla said the investment was the logical next step for Fonterra in China.

"We will complement our existing importing and consumer businesses in China by partnering with a successful local company that has access to local fresh milk supplies," said Khosla.

"The joint venture would draw on the respective strengths of Fonterra and Shijiazhuang San Lu Group. It is a professionally managed company that has a good track record for growth. It has an established sales and distribution network reaching more than 600 cities in China and also has some of the most modern milk processing facilities in China," Khosla said.

Under the agreement, three Fonterra representatives will join the seven-member joint venture board. A senior Fonterra representative will also join Shijiazhuang San Lu Group's senior executive team.

The business scope of the joint venture will continue to be the manufacture, marketing and distribution of consumer dairy products within mainland China.

The main goal of both parties is for the joint venture to become the leading dairy producer in China with high levels of competitiveness and profitability.

The joint venture will pursue a public listing of its shares at an appropriate time in the future.