• Yili - China's Top Dairy Company

Yili - China's Top Dairy Company (Photo : Getty Images)

China’s top dairy Yili is dropping its plan to purchase a controlling stake of Shengmu. The decision came after the two failed to obtain the regulatory approval.

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Upon the resumption of trade on Friday, the Shanghai-listed shares of Inner Mongolia Yili Industrial Group Co. Ltd. went down by 3.7 percent following the announcement. Hong Kong-listed shares of China Shengmu Organic Milk Ltd. had an even sharper decline of 16.4 percent when trade resumed.

The companies said that they made the decision to drop Yili’s plan to purchase 37 percent shares of Shengmu after the April 21 deadline they have set for closing the deal went by without the Chinese anti-monopoly regulator’s approval.

Without the regulatory approval, the pair will not be granted another crucial approval from the country’s foreign exchange regulator to pay for Hong Kong dollar-traded Shengmu’s shares.

“In view of the above-mentioned status of the conditions,... the parties mutually agreed on April 25, 2017, that no agreements would be entered into for such extension” of the earlier deadline, according to the official statement of Shengmu to the Hong Kong Stock Exchange on Friday.

In October, China’s top dairy Yili, together with its rival Mengniu, first revealed its plan to purchase Shengnu stake for HK $2.25 ($0.29) per Shengmu share, in an HK $5.29 billion deal.

Yili also said at the time that it planned to increase up to 9 billion yuan ($1.3 billion) in a private placement which includes the 4.6 billion yuan for the payment for the Shengmu stake. Subsequent to the cancellation of the agreement, Yili said it will also cancel the plan on the private placement.

According to Euromonitor, China’s dairy market is dominated by Yili with around 22 percent market share, followed by China Mengniu Dairy Co. with about 17 percent share. Shengmu’s share is a lot smaller at around 0.7 percent share.

The local brands are exerting effort to repair their images at home after the melamine scandal that came out almost a decade ago. Many Chinese infant formula brands were found to contain the industrial chemical. The incident gave foreign brands a boost, granting them control over a big share of the infant formula market.

After failing to get the regulatory approval and dropping the deal with Shengmu, China's top dairy Yili will have to make other plans to further dominate the market.