Paris-based food company Danone announced the sale of Dumex, its Chinese infant formula brand, to Yashili International Holdings Ltd., a division of China Mengniu Dairy Co, while simultaneously lifting its position in China-linked milk producer Mengniu.

 

Danone blames a 2013 “false alert raised by Fonterra” tied to baby milk coupled with a change in consumer preferences toward purchasing infant formula online for the poor performance in this segment. Meanwhile Mengniu has been growing sales hand over fist. Danone will use the proceeds from the sale to lift its stake in Mengniu from 7.9 percent to nearly 10 percent.

 

“[Infant formula] is not doing well and there’s too much competition. Mengniu can run the business better than Danone can in China, due to their distribution network,” said RHB OSK Securities Hong Kong Ltd. analyst Robin Yuen to Bloomberg.

 

Dumex has been weighing on Danone’s balance sheet, evidenced by an impairment charge of $437 million that the French food company was forced to take in response to lowering its long-term outlook for infant formula sales. Two years ago, Dumex was fined $28 million by Chinese officials for price fixing.

 

With the deals, Mengniu becomes one of China’s biggest makers of infant formula, a market that’ worth an estimated $20 billion today. Meanwhile, Danone is increasing its stake in a company that grew its revenue nearly twofold in the past half-decade.