Danone Finds Good Partners In Mengniu, COFCO
After 2 previous failed attempts to tap the China market, French food giant Danone (Paris: DANO) is trying yet again through a new major tie-up that includes a joint venture and equity stake in tainted dairy giant Mengniu (HKEx: 2319). This time I have to commend Danone on its choice of partners and approach in the new tie-up, which seem to show it’s learned its lesson from previous disastrous partnerships with 2 other locally controlled entities. Accordingly, the third time could finally be the charm for Danone as it looks for a success in the huge but often problematic Chinese food market. Danone’s newest China partnership will see it tie up with Mengniu through a series of transactions with the company’s state-owned parent, the massive food giant COFCO Corp. (English article) The transaction itself looks quite complex, and one of its central fixtures will see Danone form a joint venture with Mengniu to produce yogurt. Danone will own 20 percent of the venture and Mengniu 80 percent.
The deal will also see COFCO and Danone set up their own separate joint venture, which will become a repository for some of COFCO’s Mengniu shares. That part of the deal will ultimately give Danone an indirect 4 percent stake of Mengniu, while COFCO will remain Menginu’s largest shareholder with a 28 percent stake. Danone is investing about 325 million euros altogether in this new tie-up, and says it wants to eventually boost its stake in Mengniu if the tie-up is successful.
So, let’s take a look at why I think this partnership looks like a good one for Danone, and how it differs from its past tie-ups. Most importantly, both COFCO and Mengniu look like good partners for Danone, though for different reasons. Unlike Danone’s previous partners which were both locally controlled companies, COFCO is a massive, Beijing-based state-owned enterprise with strong ties to the central government.
That’s quite important because it means that if any conflicts occur Danone can talk directly with its central government contacts to try and find solutions. Experience has generally shown that entities closely connected to the central government tend to be relatively bureaucratic but are also more dependable business partners due to Beijing’s desire to see them succeed. Locally-controlled partners, by comparison, are often more interested in making quick money and using such tie-ups to their own advantage, often at the expense of the foreign partner.
Like COFCO, Mengniu also looks like a good business partner though for different reasons. The company is already one of China’s top dairy companies and thus has a relatively professional management team. But at the same time, Mengniu and most of its domestic peers have suffered for the last 5 years from a nonstop series of scandals involving contaminants in their dairy products.
That’s an important factor here, since Danone’s arrival as a joint venture partner will help Mengniu to improve the quality of its products to avoid similar problems in the future. At the same time, Danone’s arrival should help Mengniu to regain some confidence among local Chinese consumers who have shown a strong preference for imported dairy products these last few years amid all the scandals. Investors certainly liked the story, bidding up Mengniu’s Hong Kong-listed shares by nearly 9 percent after the deal was announced.
This new partnership seems to show that Danone has learned its lesson after less successful pairings with 2 locally controlled companies, Hangzhou Wahaha Beverage Group and Shanghai-based Bright Food. Both of these companies are both well known brands, and I only know them by reputation. But that said, I wouldn’t want to do business with either based on those reputations, which include lack of respect for intellectual property and lax quality controls. All that said, this latest partnership looks like a good one for Danone, and may finally give it the recipe for success that it is eagerly seeking in China.
Bottom line: Danone’s new tie-up with COFCO and Mengniu looks like a smart one, with a good chance for success due to good choice of business partners.
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