China Mengniu Dairy Co plans to raise HK$3.06 billion (US$395 million) by selling a 10 percent stake to COFCO (Hong Kong) Ltd and Hopu Investment Management Co to boost its capital for expansion, it said yesterday.

COFCO, a unit of China's largest grain trader, and private equity fund Hopu will buy 173.8 million of new Mengniu shares at HK$17.60 each, the dairy firm said in a statement to the Hong Kong Stock Exchange.

The two investors will also purchase 173.8 million Mengniu shares from the company's existing shareholders, Jinniu Milk Industry Ltd, Yinniu Milk Industry Ltd and Inner Mongolia Laoniu Community Welfare Development Association, the statement said.

The stake purchase will be conducted via a special purpose vehicle, which is 70 percent held by COFCO and 30 percent owned by Hopu. After the transactions, the two investors will become Mengniu's biggest shareholders.

"The proceeds from the share subscription will further strengthen the company's capital structure and financial position to support its future growth and expansion," Mengniu said in the statement.

The money is likely to be used to catch "opportunities which may arise as a result of the upstream milk source consolidation and development in dairy product industry," according to the statement.

Sales of major Chinese dairy producers, including Mengniu, Bright Dairy and Yili, have been hit after their products were found to contain melamine in last year's tainted milk scandal. The central government said early this month that it plans to beef up mergers and acquisitions among dairy companies to enhance the industry's competitiveness and improve product quality.

"Mengniu is in urgent need of money to develop new products and expand distribution channels in second and third-tier cities," said Lu Weiming, a China Galaxy Securities trader.

"The stock sale can give it a shot in the arm and help it boost market share before the whole industry recovers."

Mengniu's Hong Kong-listed shares halted trading yesterday pending the announcement. Its shares have jumped 89 percent so far this year after falling 65 percent in 2008.

The price clinched by COFCO and Hopu would be a 7.85 percent discount to Mengniu's Friday close of HK$19.10 per share.

(Shanghai Daily July 7, 2009)