China Mengniu Dairy Co Ltd has offered to acquire China Modern Dairy Holdings Ltd for $826 million in a deal that will help secure a stable supply of raw milk from the Chinese diary giant.
The offer comes at the heels of Hong Kong-listed China Mengniu's purchase of 965.47 million shares in Modern Dairy at HK$1.94 per share from a joint venture between KKR China Growth Fund and CDH Fund IV, raising its stake in Modern Dairy to 39.9 percent from the current 25.4 percent.
Under Hong Kong corporate regulations, the owner of more than a 30 percent stake in a company has to make an offer to buy out the shares it does not already own.
China Mengniu is expected to make an offer for the remaining shares of China Modern Dairy at the same price of HK$1.94 each, a 7-percent premium after the markets closed on Wednesday, according to a report from Reuters.
The report also forecasts Mengniu to spend another HK$6.4 billion ($826 million) on the sale, further increasing its stake to 91 percent.
In response to the news, shares of China Modern Dairy surged by almost 10 percent to HK$1.98, its highest since December last year. China Mengniu's stock dropped by 2 as much percent, versus a near 1 percent increase in the benchmark Hang Seng Index (HIS).
Once the deal is completed, Modern Dairy will remain listed in Hong Kong as some of its shareholders, including Chief Executive Lina Gao, said it will not sell their stocks, the company said in the filing.
China Mengniu said internal resources and external debt facilities will be used to fund the purchase.
The deal will enhance the business collaboration and will ensure the continuous supply of high quality and safe raw milk to Mengniu Group, the filing said.
Based in the east China's Anhui Province, China Modern Dairy is the country's biggest dairy farming firm in terms of herd and raw milk production.