Danone Plans to Sell China Dairy Stake to Appease Shareholders

(Bloomberg) --

Danone is preparing to sell its stake in a Chinese dairy company to fund stock buybacks as the French company tries to boost shareholder returns amid pressure from disgruntled investors.

Danone said Sunday it plans to sell its stake in China Mengniu Dairy Co., which has a market value of more than $2 billion, later this year. Most of the proceeds would be used to fund share repurchases. Danone shares rose as much as 2.6%.

The announcement comes hours before Danone's board reportedly meets to discuss its response to calls from investors such as Artisan Partners Asset Management Inc. for management changes. Danone Chairman and Chief Executive Officer Emmanuel Faber is facing demands for him to give up one or both of his positions at the company, which he has led since 2014.

China Mengniu climbed 1.5% early Monday amid a broader market rally in Hong Kong. Shares of the company, which makes milk, ice cream and cheese, have gained 54% over the past 12 months.

Faber said last month that Danone will divest assets that don't contribute to profitable growth. The CEO is under scrutiny after Danone shares lost a quarter of their value last year. Bluebell Capital Partners has also called on the company to replace him.

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Danone first took a stake in Mengniu in 2013. Its 9.8% holding is currently held indirectly in a venture with COFCO Corp., Mengniu's biggest shareholder, and first Danone will convert the investment into a direct holding.

The conversion process is subject to regulatory approval and the divestiture could take place in one or several transactions, depending on market conditions, the French company said. The book value of the holding is 850 million euros ($1.03 billion).

Mengniu said in a statement it respects Danone's decision and the move won't affect its business strategies and plans. The move will cut COFCO's holding to 21.4% from the current 31.3%.

The Chinese dairy maker is expected to post a 17% profit decline for 2020 amid the pandemic's disruption of the supply chain and logistics, after reporting profit growth of more than 30% in both 2018 and 2019.

Danone said that China will remain highly strategic for the company following the sale. The company started a strategic review in October, when it also announced plans to sell smaller businesses such as the Vega protein-powder brand and operations in Argentina.

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