Mengniu hikes stake in Modern Dairy

China Modern Dairy Holdings Ltd saw its shares surge almost 10 percent on Thursday, after China Mengniu Dairy Co Ltd announced an offer to buy it out in order to guarantee its stable supply of raw milk.

Hong Kong-listed China Mengniu on Thursday offered to buy 965.47 million shares in Modern Dairy at HK$1.94 apiece (25 cents), thus raising its stake in the latter from current 25.4 percent to 39.9 percent. The total value of the transaction was HK$1.87 billion.

Because the percentage surpassed 30 percent, the dairy giant will have to make an offer to buy out the remaining shares, according to Hong Kong's corporate rules.

On the heels of the news, Modern Dairy shares rallied by 9.39 percent to HK$1.98 during intraday trading and closed at HK$1.91.

China Mengniu stock, meanwhile, fell more than 2 percent, while the benchmark Hang Seng Index rose about 1.4 percent.

Carrie Chan Tsz Man, an analyst at KGI Asia Ltd in Hong Kong, said one concern was that Modern Dairy suffered a loss last year. But the deal was good news for both companies in the long term.

She added that the price of raw milk has been increasing, so it is necessary for downstream dairy companies to secure their supplies of raw milk.

Owning about 230,000 cows in China, Modern Dairy is one of the country's largest dairy farming firms and raw milk producers. In 2008, China Mengniu signed a 10-year raw milk supply off-take agreement with it.

But the proportion of its supply to Mengniu has sharply decreased recently, noted Hannah Li Wai-han, a strategist at UOB Kay Hian Hong Kong.

She added that the percentage used to be above 90 percent but was now only about 70 percent.