Mengniu’s deal to increase China Modern Dairy stake seen as rescue by some, synergy by others
Mengniu is increasing its stake in CMD, which controls China’s largest cattle herd, from 25.4 to 39.9pc by buying a 9.8pc stake from another investor, KKR
Analysts are divided on the merits of China Mengniu Dairy’s acquisition of China Modern Dairy (CMD), with some viewing it as nothing more than a “rescue” while others see synergy between the two mainland Chinese dairy firms.
On January 5, Mengniu announced it would increase its stake in CMD, which controls China’s largest cattle herd, from 25.4 per cent to 39.9 per cent by buying a 9.8 per cent stake from another investor, global investment firm, Kohlberg Kravis Roberts (KKR).
“We view this deal a pure rescue for China Modern Dairy given the stretched valuation Mengniu paid to become CMD’s largest shareholder, while it helped CMD get rid of the VAM (valuation adjustment mechanism) with KKR],” China International Capital Corp analyst Paul Yuan Feiyang said in a report.
Rating agency S&P placed the “A-” rating on Mengniu’s long term corporate credit on watching list, warning that Mengniu will potentially face higher financial burden following the proposed increase in its stake in China Modern Dairy Holdings.
We view this deal a pure rescue for China Modern Dairy given the stretched valuation Mengniu paid to become CMD’s largest shareholder, while it helped CMD get rid of the VAM (valuation adjustment mechanism)
As part of the deal Mengniu will also receive a share placement from CMD priced at HK$1.94 per cent per share, 7.2 per cent higher than CMD’s closing price before the announcement. Mengniu is spending a total of HK$1.9 billion for the KKR stake and the share placement.
