5 Lessons from the Danone-Mengniu deal

No retreat or surrender from the China market.  Bien joué, Danone!

Danone, the French dairy giant, is hoping that the third time is the charm as they re-enter the China market with some creative and well-considered partnerships. Its latest set of bold JVs with SOE giant COFCO – China’s largest food company –  and Mengniu Dairy  is a noteworthy  example of mutually beneficial deal structure built to leverage each partner’s unique competencies. Danone has made accessing the China market a strategic priority – especially as its European market base collapses. Mengniu is a leader in the Chinese market for milk, yoghurt and dairy products – but its reputation has been badly damaged by repeated scandals involving milk products tainted with melamine. The Danone-Mengniu deals reinforces the relative strength of each of its partners – both parties get to do what they are best at and create new value in a growing market.

Three-Way Deal Points

Danone’s immediate investment is for the equivalent of US $417 million into Mengniu’s main investor, COFCO. A new JV will be formed between COFCO and Danone, with the SOE taking a 51% majority position. The investment will take give Danone a 4.1% indirect stake in Mengniu and a seat on the board – with the possibility of enlarging the position to 10% in coming years. A second JV between Danone and Mengniu will focus on making and distributing chilled yoghurt products – and is expected to take 21% of the huge Chinese market for such drinks.

Third Time’s the Charm

Regular readers will know that Danone is one of the main cases from the Fragile Bridge  used to demonstrate what NOT to do in a Chinese business dispute. Their conflict and ultimate failure to maintain a 51% stake owned JV with Wahaha was a recipe for disaster – they owned too much equity in a powerful Chinese brand, didn’t control the IP, lost control of their own competitive advantage and most of all – picked the wrong partner. Wahaha, headed by Zong Qinghou, China’s richest individual, was too powerful, too independent – and in the end too capable to be satisfied with a minority stake in a Chinese business that it could run on its own. Danone dug its own grave and then executed terribly – ultimately beating a retreat after a bruising battle that reached to all the way to the top levels of Chinese and French governments.

Lessons from the DANONE – Mengniu Deal

This time Danone did a lot of things right. This is a deal that will be discussed for years, but right now there are 5 big takeaways of interest to international negotiators.

  1. Danone kept trying. China is strategic for Danone, and it is putting its money, its management and its reputation where its mouth is. The Danone-Wahaha battle was a bruiser, followed by another painful false start between Danone and Mengniu in 2007.
  2. They pursued different avenues with new partners. This is the 3rd try for Danone- they didn’t give up, and kept learning from its efforts, eventually completing this complex and far-reaching set of partnerships. This is a complex, non-traditional deal that involves multiple counterparties.
  3.  Good partner selection. Danone has found a good partner –or really, two partners. Mengniu’s largest stakeholder and its largest stakeholder, COFCO. For Danone, it is the best of both worlds – the SOE should help navigate the perilous waters of China bureaucracy, and the private Mengniu has distribution and brand recognition.
  4.  Each side is leveraging its strengths in a way that reinforces its competitive advantage. Danone is bringing to the table its expertise and reputation for food safety and cutting-edge manufacturing processes. Since the 2008 melamine scandal, Mengniu needs to protect its brand name and demonstrate that it is safe to eat. Since Danone’s presence is solving a branding problem for the local partner, it can’t be easily shouldered out of the way this time. The more successful the JV becomes, the stronger the Danone presence will be. Danone’s local partners won’t outgrow it as it did with the Wahaha deal.
  5. Danone went in smaller with established partners. In the Wahaha deal, Danone was the major shareholder and the main brand name. It created a stand-alone franchise that its locally connected partner found too good to resist. This time Danone is taking a smaller stake in existing brands (though it will be developing its own Bio and Dumex infant formula) and securing government backing early in the process.

Danone has achieved the kind of deal that MNCs should emulate when trying to exploit the China market – it is creating a JV where its position gets stronger as the brand succeeds. Both the partner and the regulator actually want to see Danone stick around.

In many ways, this is reminiscent of Disney’s deal to build a theme park in Shanghai with SOE partners. It is emblematic of a new breed of deal making in China – foreign firms taking a smaller piece where their value is unique, irreplaceable, and non-threatening. Disney and DreamWorks do creativity – Danone does food quality and safety. This comforts Chinese consumers (and regulators) without threatening their assumptions or bruising their egos. Ownership and customers both have good reasons to keep the western brand in the loop. The foreign presence is enhancing value – not claiming it.

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A Bibliography of recent reports:

August 2012
Great Moments in Chinese Conflict Management: The Danone Fail
Great moments in Western-Chinese conflict, from The Fragile Bridge – Conflict Management in Chinese Business:

http://www.chinesenegotiation.com/2012/08/great-moments-in-chinese-conflict-management-the-danone-fail/
Groupe Danone of France was a frontrunner in the race to win the China market, striking what it thought was a win-win deal with a well-known Chinese brand, Wahaha. The two companies formed the first of a series of JVs in 1996 using a fairly typical structure of those times that ultimately gave Danone fifty-one percent of the new firm – and rights to the Wahaha trademark – in exchange for an investment of $41 million. Or so the French dealmakers believed. In a move that now seems naïve, Danone maintained the partnership agreement even after Chinese regulators struck down the transfer of the trademark. Instead, the two firms made a private contractual agreement to transfer use of the Wahaha name to Danone – a deal that would later be found insufficient to protect the French group’s interests in China.

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Danone Official Press Release: May 21, 42013

http://media.corporate-ir.net/media_files/IROL/13/131801/Danone_COFCO_Mengniu_ENG.pdf
COFCO, Mengniu and Danone Join Forces to Accelerate the
Development of Fresh Dairy Products in China
COFCO, the State-owned largest food company in China, has signed an agreement with
Danone, pursuant to which the two parties will form a joint-venture. COFCO has agreed to sell 148,014,022 shares in China Mengniu (a Hong-Kong listed company) to the joint venture. COFCO and Danone will own 51% and 49% respectively in the newly formed company. After the transaction, COFCO will continue to be the single largest shareholder in Mengniu. Danone will become a strategic shareholder in Mengniu, owning an indirect interest of approximately 4% at the initial stage, with an aim to increase the interest in Mengniu based on market conditions in the future.
In addition, Danone and Mengniu today signed a framework agreement to establish a joint venture for the production and sales of chilled yogurt products in China, combining their respective assets in this category for a total 2012 pro-forma net sales of about 500 million euros, with an estimate market share around 21% and 13 factories across China. This joint venture will benefit from the complementarity of Danone and Mengniu brands. It will achieve synergies by introducing Danone’s undisputed worldwide expertise in quality and product innovation, while fully leveraging Mengniu’s leadership and distribution capability in China’s yogurt category. Danone will own 20% and Mengniu 80% of the new joint-venture in China. Danone will assign experienced senior executives to join the top management team, assisting Mengniu to further upgrade its management capability.

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Financial Times – 5/20/2013

Danone aims to end China struggles with Mengniu deal
By Leslie Hook in Beijing and Hugh Carnegy in Paris
http://www.ft.com/intl/cms/s/0/261d51ae-c13a-11e2-b93b-00144feab7de.html#axzz2Tqo9Cy00

Danone is hoping it will be third time lucky in China after the French food group said it would invest €325m in two joint ventures with Mengniu, one of the big Chinese producers tarnished by a 2008 scandal over contaminated baby formula.

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Reuters 5/20/2013

French food group Danone takes second chance with China Mengniu
http://www.reuters.com/article/2013/05/20/us-chinamengniu-danone-idUSBRE94J01920130520
(Reuters) – Danone Group (DANO.PA) has agreed to invest 325 million euros ($417 million) in two deals with China Mengniu Dairy Co Ltd (2319.HK), marking a comeback for the French group in China where scandals have hurt confidence in food safety.

French food group Danone takes stake in China Mengniu
http://www.scmp.com/business/companies/article/1241892/french-food-group-danone-takes-stake-china-mengniu
A Danone Group joint venture has agreed to take a stake worth about HK$3.6 billion in China Mengniu Dairy, marking a comeback for the French company in China where food scares have hit consumer confidence.
China Mengniu, one of the country’s largest dairy producers, also said on Monday it would set up an 80 per cent-owned joint venture with Danone to develop a chilled yoghurt product portfolio in China, Hong Kong and Macau

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Just-Food.com 5/20/2013

CHINA: Danone, China’s Mengniu try again with dairy JV
By Dean Best | 20 May 2013
http://www.just-food.com/news/danone-chinas-mengniu-try-again-with-dairy-jv_id123261.aspx

Danone and Chinese dairy Mengniu have announced plans to set up a dairy venture in China – five years after a similar agreement ended in just 12 months.
The French food giant today (20 May) announced two deals involving Mengniu.
One will see the two companies combine their yoghurt assets in China to form a venture that will produce and distribute products around the country. Danone will hold a 20% stake in this partnership, which will have 13 plants across China and, the French firm, claimed a market share of around 21%. Danone’s second agreement is with state-owned food group COFCO, the largest shareholder in Mengniu. The state-backed group has sold shares in Mengniu to the venture; COFCO will hold a 51% stake in the venture, with Danone owning the rest.
Through this agreement, Danone will become a shareholder in Mengniu, indirectly owning 4% in the company. Danone said it aimed to own more of the business “based on market conditions in the future”.
In 2007, Danone and Mengniu ended a venture in China that had seen the two companies produce and distribute fresh dairy products in the country. At the time, the companies said the business conditions for the venture had not been met.
Danone will invest around EUR325m (US$418.3m) as a result of the two agreements. Today, Danone chairman and CEO Frank Riboud said the new deals would help the Activia owner boost its presence in China. “Joining the strengths of Danone, COFCO and Mengniu will create the winning combination to unlock the potential of the fresh dairy products category in China. Backed by COFCO’s extensive expertise in the Chinese food industry and by Mengniu’s nation-wide leading platform in the Dairy sector, our brands will benefit from significantly wider reach to the largest number of Chinese consumers,” he said.

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