China's Yili Scraps $667 Million Milk Deal; Shengmu Drops

(Bloomberg) -- Inner Mongolia Yili Industrial Group Co. terminated a planned 4.6 billion yuan ($667 million) purchase of a stake in China Shengmu Organic Milk Ltd. because it didn't win regulatory approval from Chinese authorities. Shengmu shares dropped by the most since 2015.

The termination also cancels Yili's offer to buy outstanding shares of Shengmu, according to a statement from the companies to the Hong Kong exchange Friday. Hong Kong-listed Shengmu fell as much as 14 percent, the biggest drop intraday since August 2015. Yili declined 3.4 percent in Shanghai.

Yili announced last October it would purchase a 37 percent stake of Shengmu, the country's largest producer of hormone-free dairy. Shengmu has said it's the country's only milk producer currently certified to meet European standards for organic milk.

China's dairy industry is still struggling to win back the trust of customers after a series of food safety scandals. That's increased competition between Yili and China Mengniu Dairy Co., for a premium organic segment that makes up just 1 percent of the country's milk consumption in a $55 billion Chinese dairy market.

The companies said they hadn't received the required approval of China's Anti-Monopoly Bureau of the Ministry of Commerce before the agreement's end date of April 21. The closing date was not postponed by the companies, ending the sale. Separately, Yili also said it would end its plan to raise as much as 9 billion yuan in a private placement, partly to fund the deal.

To contact the reporter on this story: Daniela Wei in Hong Kong at jwei74@bloomberg.net.

To contact the editors responsible for this story: K. Oanh Ha at oha3@bloomberg.net, Dave McCombs