(Yicai Global) Oct. 28 -- An agreement between Inner Mongolia Yili Industrial Group and Ausnutria Dairy for the Chinese dairy giant to become the infant formula maker’s biggest shareholder by buying HKD6.25 billion (USD804 million) of stock sent the shares of both companies higher.

After climbing as much as 3 percent earlier today, Yili [SHA:600887] closed 1.2 percent up at CNY40.76 (USD6.37). Ausnutria [HKG:1717] gained 6.8 percent to HKD9.45 (USD1.22), valuing it at HKD16.2 billion (USD2.54 billion).

Yili will acquire 531 million shares from Ausnutria shareholders at HKD10.06 apiece and 90 million new stock at the same price, giving it a 34.33 percent stake, the pair said in a joint statement released yesterday. The deal will trigger a mandatory general offer, forcing Hohhot-based Yili to make a tender offer of HKD10.06 per share to Ausnutria’s shareholders, according to Chinese regulations.

Buying into Ausnutria will make Yili the second-biggest player in China’s infant formula market, close to industry leader China Feihe, dairy analyst Song Liang told Yicai Global. Last year, Feihe and Yili had market shares of 15.6 percent and 6 percent, respectively, according to US market research firm Nielsen.

Yili said the deal will bolster its competitiveness in the infant formula market and enable the parties to cooperate on supply chains, research and development, comprehensive health care services, and sales channels.

The deal means the stake of Ausnutria’s current No. 1 investor, Citic Agricultural Industry Fund Manager, will drop to 5.11 percent from 22.05 percent, while that of Center Laboratories and persons acting in concert will fall to 7.23 percent from 20.1 percent. The holding of Yan Weibin, chairman of Hunan province-based Ausnutria, will dip to 6.71 percent from 7 percent.

Yili’s operating revenue, mainly generated from milk sales, was CNY56.5 billion (USD8.8 billion) in the first half of the year, versus CNY45.9 billion at main rival China Mengniu Dairy, per their latest earnings results.

Ausnutria is a leader in China’s goat milk powder and high-end milk powder business. It acquired the Netherlands’ Hyproca Dairy Group in 2011. In the first half, Ausnutria’s revenue rose over 10 percent to CNY4.3 billion (USD672 million). The firm’s net profit was CNY594 million (USD92.8 million).

Editors: Dou Shicong, Futura Costaglione