China Mengniu Dairy, one of the largest dairy companies in China, has agreed to acquire a majority stake in a subsidiary of local peer China Shengmu Organic Milk.

In a deal announced on 24 December to Hong Kong’s stock exchange – on which both groups are listed – China Mengniu Dairy is to buy 51% of Inner Mongolia Shengmu High-tech Dairy Co., a subsidiary doing business in dairy farming and the sale of raw milk.

China Mengniu Dairy will hold the stake through its own Inner Mongolia Mengniu Dairy (Group) Co. subsidiary. China Shengmu Organic Milk, said to be the country’s largest producer of raw organic milk, will continue to hold a 49% stake in the business.

The transaction will see China Mengniu Dairy pay CNY303.4m (US$44.2m) for 51% of a business that made a loss after tax of CNY1.19bn in 2017.

As part of the deal, China Shengmu Organic Milk – which is principally engaged in dairy farming and liquid milk – will reorganise its operations and transfer all its “downstream dairy business chain and related assets” to Inner Mongolia Shengmu High-tech Dairy Co., the stock-exchange filing read. Those assets will include Huhehaote Dairy, another subsidiary.

The move will mean Inner Mongolia Shengmu High-tech Dairy Co. becomes “a company with complete business chain and assets to conduct production and distribution of organic dairy products, excluding infant formula and other formulas powder products”, the filing added.

In the filing, China Shengmu Organic Milk expanded on the rationale for the deal.

“As one of the leading dairy product manufacturers in the People’s Republic of China, China Mengniu is equipped with a strong management team and a solid Chinese dairy product distribution network.

“[China Shengmu Organic Milk] believes that with China Mengniu’s core advantages and the favourable dairy policy introduced by the government of the PRC, it can bring values to the shareholders of the [China Shengmu Organic Milk] via maintaining a mutually beneficial partnership with China Mengniu.

“Under the current market conditions, the operation of dairy business requires vast resources of the group. The directors consider it is beneficial for the group to cooperate with China Mengniu.”

The deal remains subject to a number of conditions, including due diligence being completed.

In 2017, a plan by one of Mengniu’s principal nationwide rivals, Inner Mongolia Yili Industrial Group Co., to buy a stake in China Shengmu Organic Milk hit the buffers after the companies failed to secure regulatory approval for the transaction.

On 21 December, China Shengmu Organic Milk issued a profit warning after booking impairment charges related to “trade receivables and other receivables”. It said it expected to book a loss for 2018.

In 2017, China Shengmu Organic Milk filed a loss of CNY985.9m. It posted a 21.9% fall in revenue to CNY2.71bn.