Why did Danone abandon Mengniu for 8 years of “holding hands”?
Editor’s note: This article is from the micro-channel public number “node Finance” (ID: jiedian2018), Author: A shares monarch.
For eight years, Danone and Mengniu are going to go their separate ways.
On March 1, the first trading day after the Lantern Festival, Mengniu Dairy (02319.HK) issued an announcement stating that Danone, the company’s second largest shareholder, will change its shareholding method from indirectly holding Mengniu through COFCO Dairy Investment. Dairy’s equity has been transformed into a direct holding of 9.82% of Mengniu Dairy’s equity, and at the same time it is considering further reducing its holdings in Mengniu Dairy.
On the same day, Danone also announced that it will reduce its holdings of Mengniu shares through one or more transactions in 2021 based on market conditions.
After 8 years of “long-distance running”, he “breaked up” once. Although both parties did not disclose the specific reasons for the reduction, there have been a lot of speculations about this.
01 Low performance and weak stock price, Danone reduces its stake in Mengniu
The “marriage” between Danone and Mengniu began in 2013.
At that time, Mengniu had entered the COFCO era. Danone paid about 1.25 billion yuan through a joint venture with COFCO to obtain a 4% stake in Mengniu and was promoted to a strategic shareholder. In 2014, Mengniu issued approximately 6.6% of its shares to Danone. After paying HK$5.153 billion, Danone finally took the position of Mengniu’s second largest shareholder with a 9.9% shareholding ratio.
As an important investor in Mengniu, Danone has supported Mengniu in terms of technology and experience, especially in the low temperature field. It has seen its growth and growth in eight years and has also reaped considerable benefits.
From 2013 to 2019, Mengniu’s revenue increased from 43.357 billion yuan to 79.03 billion yuan, and its net profit attributable to its parent increased from 1.631 billion yuan to 4.105 billion yuan, and its stock price rose about 400%. Danone said in the announcement that Danone’s indirect equity holdings in Mengniu are currently valued at approximately 850 million euros, and the associated company contributed 57 million euros in recurring income in 2019.
Data source: Mengniu Dairy Financial Report
But on the other hand,Danone’s own development has been mediocre. With the rise of domestic dairy companies, Danone’s market share has been squeezed to a certain extent. In addition, due to the impact of the epidemic, Danone’s performance is sluggish and its share price is sluggish.
On February 19, Danone’s 2020 financial report showed that the company achieved revenue of 23.6 billion euros in 2020, down 1.5% year-on-year, and earnings per share increased 1% year-on-year to 2.99 euros.
Among the three major categories, the drinking water and beverage business declined the most, with a year-on-year decrease of 16.8%, and the recurring operating profit margin fell to 7.0%; the sales revenue of specialized special nutrition business fell by 0.9% year-on-year, and the recurring operating profit margin fell by 74 Basis points to 24.5%.
In fact, signs of Danone’s performance decline have already appeared in the third quarter of 2020. In the third quarter of 2020, Danone’s sales revenue was 5.821 billion euros, a decrease of 2.5% year-on-year.
Among them, the sales revenue of drinking water and beverage business fell by 13.5% year-on-year, sales volume and sales fell by 8.1% and 5.4% respectively; the special nutrition business, due to a double-digit decline in the milk powder business in China, resulted in a total revenue drop of 5.7% , Sales volume and sales fell by about 2.9%.
The unsatisfactory data was transmitted to the capital market. In 2020, Danone’s share price fell 27%, which was at a low point in the past seven years. The loss of market value was about a quarter, triggering investor dissatisfaction.
For this reason, Danone announced in the third quarter of 2020 that it will make strategic adjustments, including reshaping the organizational structure, strengthening brand portfolio advantages and differentiation through investment, and conducting strategic evaluations of the business portfolio; implementing a 1 billion euro cost saving plan to increase Support for innovation and brand development; strengthen the supervision of management’s implementation of the plan.
According to the Financial Times, the divestiture of Mengniu’s investment is also part of Danone’s commitment to investors. In addition to Mengniu, Danone is currently evaluating its business in Argentina and the Vega brand, and intends to achieve portfolio optimization and improve shareholder returns through a series of asset disposals.
However, there is another view that Danone’s move may also be related to the shrinking investment income.
Node Finance (ID:jiedian2018) noticed that in Danone’s latest 2020 financial report, the recurring net income from associates fell to 85 million euros, a decrease of 13 million euros from the previous year. Mengniu and Yashili’s performance in the first half of the year are related.
02 Competitors to each other: The two sides will jointly compete in the domestic milk powder market
From an operating point of view, Danone’s reduction of Mengniu’s holdings may cause a crash between the two parties’ businesses.
In recent years, both foreign and domestic dairy companies will have high growth potentialAnd high-margin, high-value-added milk powder business as the direction of development.
According to Danone’s financial report, Danone will increase its professional special nutrition business in China, especially infant milk powder and nutrition business.
In terms of specific performance, in May 2020, Danone wholly-owned the Qingdao Milk Powder Factory; Danone once again invested in the establishment of the Shanghai Open Research Center and the establishment of special nutrition production bases in Qingdao and Wuxi after two months. In other words, in 2020 alone, Danone’s investment in infant milk powder and nutritional products business segment will reach nearly 100 million euros.
Mengniu bought Yashili in 2013, Yashili acquired Dumex in 2016, and Bellamy, an Australian manufacturer of organic infant formula milk powder, also aimed at the “fat” piece of infant milk powder.
In May 2020, Mengniu Group President Lu Min stated at the media communication meeting on the specific goals of the milk powder business: “The milk powder business will enter the top three in China within three years.”
From the perspective of the strategic layout of the two parties, Danone and Mengniu have become competitors invisibly, and in the increasingly fierce competition for infant milk powder in China, apart from Yili and Mengniu, the dairy duo, Feihe , Junlebao, Biostime and many other local brands, this kind of competition is expected to be more intense. In this case, Danone would be the “guest” of Mengniu and the “big tree” behind it, it is estimated that it is not suitable.
Based on this, it is reasonable for both parties to “divide between labor and swallow.”
As for the impact of “breaking up” on both parties? For Danone, whose performance has fallen and its stock price has fallen, selling Mengniu’s shares to change its investment strategy is an important measure to improve performance and ease investor sentiment.
For Mengniu, the reduction of Danone’s holdings will not change Mengniu’s actual power structure. COFCO is still the largest shareholder, and business development and established strategies will not be affected. However, as the relationship with Danone turns from cooperation to competition, the space for future cooperation between the two parties may be further compressed.
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