Danone has become the second largest shareholder in China’s leading dairy company, Mengniu, after upping its stake to 9.9%.

Previously, Danone’s shareholding in Mengniu stood at 4% and it will now be second only to COFCO (China’s largest state-owned food company).

Mengniu said anticipated proceeds of HK$5.2bn (around $665m) from the share purchase would be used to repay its outstanding balance on a loan in connection with its acquisition of Yashili International Holdings, and other corporate debt. 

The share sale was consistent with Danone’s strategy to increase its interest in Mengniu to capture the “huge growth potential” of the chilled dairy products market in China, said Danone chairman and CEO Franck Riboud. “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.

In parallel with Danone’s purchase, Danone, Arla Foods and COFCO have agreed to combine their stakes – of 9.9%, 5.3% and 16.3% respectively – through a new joint venture, COFCO Dairy Investments, which will represent their mutual interests totalling 31.5%.

“By leveraging the strengths of our three strategic shareholders, Mengniu will be better positioned to capitalize on future opportunities and realize its vision of ‘becoming the most professional and dedicated dairy products manufacturer known for the best product quality and safety’,” said Mengniu  CEO Elaine Sun Yiping.

Danone’s transaction provided a catalyst for consolidating the equity of Mengniu’s key shareholders, said Frank Ning Gaoning, chairman of COFCO. “The restructuring of the shareholdings of COFCO, Danone and Arla Foods in Mengniu would align our interests with those of Mengniu, further enhancing its leading market position in China’s dairy industry.”

Arla said its strategic partnership with Mengniu was unaffected by Danone upping its stake.

“Arla Foods is pleased to stay more closely with our partners COFCO and Danone under the same joint venture framework,” said Finn Hansen, executive vice president of Arla Foods and non-executive director of Mengniu. Arla would continue to work closely with Mengniu on a number of initiatives at the China-Denmark Milk Technology and Cooperation Centre in Beijing. 

Mengniu sells dairy products including UHT milk, milk beverages, yogurt, ice cream and milk powder.

Danone’s increased subscription is subject to the approval of Mengniu’s shareholders but is expected to be finalised within the next few months.