French dairy giant Danone plans to become the second-largest shareholder in China Mengniu Dairy Co., raising its stake from 4% to 9.9% through a rights issue.

Danone first took a stake in Mengniu last May when the two companies established a yoghurt joint venture. The group will now pay HK$42.5 (US$5.5) per newly-issued Mengniu share, representing a 15.3% premium on the Chinese firm’s closing market price yesterday (11 February).

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Mengniu said proceeds of HK$5.15bn will be used to “improve [its] capital structure” by paying down debt associated with its acquisition of formula maker Yashili International Holdings last year.

Danone chairman and CEO Franck Riboud said the share purchase would allow the French firm to use its partnership with Mengniu to “capture the huge growth potential” of the chilled dairy products market in China. “The alliance represents the winning combination to unlock this potential and develop healthy and tasty products, spreading Danone brands to millions of Chinese consumers,” he added.

After the transaction, Mengniu’s three largest shareholders – Chinese state owned enterprise COFCO Dairy Investments, Danone and fellow European dairy group Arla Foods – will combine their shareholding, which will be administered through a joint venture company, COFCO Dairy Investments. Upon completion of the rights issue, COFCO, Danone and Arla will hold 16.3%, 9.9% and 5.3% of Mengniu shares respectively. The venture, which will hold combined share capital of 31.5%, will represent their mutual interests, the companies said.

COFCO chairman Frank Ning Gaoning explained the restructuring allows the company’s largest shareholders to “align our interests” with those of Mengniu, “enhancing its leading market position in China’s dairy industry”.

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Mengniu CEO Elaine Sun Yiping suggested the rights issue and new capital structure would enable it to work more closely with its strategic investors. “By leveraging the strengths of our three strategic shareholders, Mengniu will be better positioned to capitalize on future opportunities and realise its vision of becoming the most professional and dedicated dairy products manufacturer known for the best product quality and safety.”

Arla executive vice president Finn Hansen said the Danish dairy was “unaffected” by the rights issue. “We will continue to work closely with Mengniu on a number of initiatives at the China-Denmark Milk Technology and Cooperation Centre in Beijing,” he added.