---
title: "Within 3 Billion Yuan! Mengniu to Take Control of Cheese Leader Milkground"
description: "As 2020 draws to a close, capital operations in China's dairy industry show no signs of slowing. On December 13, Milkground announced that dairy giant Mengniu would take control of it, requiring a cash payment of no more than 3 billion yuan. This marks Mengniu's first foray into controlling a cheese company, following its control of milk powder and upstream pasture stocks. The company stated it aims to build a 'leading Chinese, world-class' cheese enterprise."
author: "New Distribution"
publisher: "New Distribution"
email: "zhaobo258@gmail.com"
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published: "2020-12-14"
language: "en"
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# Within 3 Billion Yuan! Mengniu to Take Control of Cheese Leader Milkground

> As 2020 draws to a close, capital operations in China's dairy industry show no signs of slowing. On December 13, Milkground announced that dairy giant Mengniu would take control of it, requiring a cash payment of no more than 3 billion yuan. This marks Mengniu's first foray into controlling a cheese company, following its control of milk powder and upstream pasture stocks. The company stated it aims to build a 'leading Chinese, world-class' cheese enterprise.

As 2020 draws to a close, capital operations in China's dairy industry show no signs of slowing.
On December 13, Milkground officially announced that dairy giant Mengniu would take control of it. To successfully control this leading cheese stock, Mengniu will need to pay no more than 3 billion yuan in cash.
This also means that after successively controlling milk powder stocks and upstream pasture stocks, Mengniu will for the first time control a cheese stock. The company stated today that it will build a 'leading Chinese, world-class' cheese enterprise.
Let's first look at the key points of Milkground's announcement today.
Milkground stated today that the company plans to issue new shares privately to raise a total of no more than 300,000 million yuan, with a private placement price of 29.71 yuan per share, and an issuance volume of no more than 100,976,102 shares. The target of this private placement is Inner Mongolia Mengniu, which will subscribe to all the newly issued shares in cash and has signed a conditional share subscription agreement with the company.
After deducting issuance expenses, the net proceeds will be used entirely for the Shanghai specialty cheese intelligent production and processing project, the Changchun specialty dairy comprehensive processing base project, the Jilin natural cheese processing construction project, and supplementary working capital.
Before the trading suspension, Milkground's stock price was 39.17 yuan. Since last year, the company's stock price has risen by more than 410%.
Before the completion of this transaction, Chai Xiu remains the controlling shareholder of the company. After the transaction, Inner Mongolia Mengniu will gain control of the listed company, and the controlling shareholder will change to Inner Mongolia Mengniu.
Assuming the maximum issuance volume, after the issuance, Inner Mongolia Mengniu will hold 23.80% of Milkground's equity, while Chai Xiu and her subsidiary Dongxiu Trading will collectively hold 15.95%. Previously, their holdings were 5% and 19.88%, respectively.
According to the introduction, the effectiveness and implementation of the private placement matters are subject to:
> 1) Approval by Milkground's shareholders' meeting of the relevant private placement plan as agreed in the agreement;
> 2) The private placement passing the anti-monopoly review of the State Administration for Market Regulation;
> 3) Approval of the private placement plan by the China Securities Regulatory Commission;
> 4) Approval from other necessary administrative approval authorities for the private placement (if applicable).
Milkground's stock will resume trading on the 14th.
What Mengniu is taking control of this time is a domestic cheese company that focuses on the vertical dairy segment and had annual revenue of about 1.8 billion yuan last year.
Mengniu told Shidai today that this investment aligns with Mengniu's strategy to rapidly strengthen its cheese business, and the two parties will complement each other in R&D innovation, market development, brand building, capacity layout, and talent teams.
According to Milkground's 2020 third-quarter report, the company's revenue from January to September this year was approximately 1.876 billion yuan, a year-on-year increase of 61.92%, mainly due to a significant increase in cheese product sales compared to the same period last year. Net profit attributable to shareholders of the listed company was approximately 52.8447 million yuan, a year-on-year increase of 348.50%.
**Interestingly, Shidai noted today that both parties agreed to ensure the stability of the listed company's existing management team. For three years after Mengniu gains control, Chai Xiu will be responsible for the listed company's operations and management. During this period, the general manager, deputy general managers, and board secretary will be appointed by Party A or its recommended persons, and Mengniu has the right to recommend a chief financial officer to the listed company.**
According to the cooperation agreement disclosed today, if the listed company's revenue compound annual growth rate exceeds the average level of China's cheese industry in 2021, 2022, and 2023, Chai Xiu will continue to be responsible for the listed company's operations and management for 36 months after the aforementioned period expires. After the aforementioned period expires, the two parties will separately negotiate performance assessment indicators for the listed company.
Mengniu told Shidai today that it will maintain the stability of Milkground's existing core management team and fully support Milkground's high-quality and sustainable development.
Looking back at this transaction, although the market had long anticipated it, Mengniu's entry was full of twists and turns. As early as July last year, there were multiple reports that Mengniu would acquire Milkground, but the latter subsequently denied it in an announcement. Meanwhile, Mengniu's relevant person in charge did not confirm the rumors.
At that time, there were also public reports that the main obstacles to the transaction were price and acquisition method. Milkground's asking price was somewhat high, and there was a valuation bubble, with potential acquirers focusing on 'squeezing the bubble.' In terms of acquisition method, Mengniu preferred Milkground to spin off its cheese business and sell it separately, while the latter hoped Mengniu would purchase both the cheese and liquid milk businesses of Milkground as a whole.
Although the acquisition rumors were denied, the two companies eventually came together. In January this year, Mengniu announced it would acquire 5% of Milkground's shares for approximately 280 million yuan, and also acquire 42.9% of the shares of subsidiary Jilin Technology, which holds almost all of the listed company's production capacity assets, for approximately 460 million yuan. The total consideration was about 740 million yuan. With this investment, Mengniu became the second-largest shareholder of Milkground.
Later, the two parties experienced a 'reversal drama.' In March this year, Mengniu planned to subscribe to new shares issued by Milkground in a private placement for no more than 315 million yuan to support the latter's cheese capacity expansion. If the subscription was completed, Mengniu's stake in Milkground would rise to approximately 8.8%.
However, in August this year, Milkground terminated the aforementioned private placement plan, explaining that the termination was proposed after comprehensively considering the latest regulatory requirements, the capital market environment, and the company's actual situation, and would not have a significant impact on the company's normal operations and sustained stable development.
In response, Lu Minfang also said at the 2020 interim results conference that the withdrawal of the issuance was mainly due to some policy changes. He also said that the initial investment in Milkground was partly to expand capacity to support Mengniu's cheese development. 'In fact, our retail cheese (in the first half) saw triple-digit growth, but this growth is actually limited by our capacity. Investing in Milkground provides synergistic OEM support, which will accelerate the supplementation of our domestic capacity.'
The change in investment does not prevent Mengniu from being optimistic about cheese. At the aforementioned meeting, Lu Minfang emphasized that Mengniu's overall cheese strategy has not changed, and it is very confident in this business, and in the future, it will 'develop imported cheese and domestic cheese simultaneously.'
In fact, Mengniu, which plans to 'walk on two legs,' has already found a 'partner' for its cheese business.
In July this year, Mengniu and Danish dairy giant Arla's new joint venture in China was approved. Mengniu will inject all its cheese business into the new joint venture established with Arla. The two parties will create the Arla brand focused on cheese, thereby completing 'the integration from production and processing to terminal sales.'
'Arla mainly provides advanced cheese production technology and strong cheese R&D capabilities, while Mengniu mainly provides strong marketing and promotion capabilities in China and extensive sales channel resources,' Mengniu told Shidai at the time. The new joint venture's product line includes children's cheese, snack cheese, table cheese, and high-end cheese products, with brands including Arla, high-end cheese brand Castello, and professional butter brand Lurpak.
Now, this cooperation has been implemented. Lu Minfang revealed in August: 'Our Wuhan factory has started construction and will soon be put into production.' Data shows that the Mengniu cheese factory in Wuhan is expected to be completed and put into production in spring 2021, with a designed capacity ranking first in Asia.
Shidai noted today that after the completion of this transaction, Mengniu will have overlapping businesses with the listed company in cheese, liquid milk, and other areas. Mengniu promises to resolve the horizontal competition issue within 5 years from the completion of this transaction, and strive to do so in a shorter time. **After the completion of this transaction, Inner Mongolia Mengniu will, in principle, use the listed company as the operating platform for its domestic cheese business.**
In recent years, the Chinese cheese market, which has attracted frequent moves by Mengniu, has shown explosive growth.
According to a report released by Mintel in January this year, although the overall scale is still small, the Chinese cheese market has achieved a compound annual growth rate of 30.1% over the past five years, ranking first globally. In contrast, mature European cheese markets such as the UK, Spain, Belgium, Switzerland, Finland, and Italy have seen flat or slight declines in recent years.
At the 2019 Cheese Development Summit Forum, Yu Kangzhen, Vice Minister of Agriculture and Rural Affairs, said that China's cheese development has broad market prospects and huge potential. By making efforts on both the production and consumption sides, while stably developing liquid milk, we should cultivate cheese as a new consumption growth point for dairy products, transform consumers from 'drinking milk' to 'eating milk,' and better leverage consumption to drive production.
Source: Shidai (ID: foodinc)
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