By  on August 11, 2014

(Bloomberg) — Dairy Farm International Holdings Ltd., an operator of supermarkets and retail stores, is paying 5.69 billion yuan, or $925 million, to buy 20 percent of Yonghui Superstores Co. as it seeks to tap China’s growing consumer market.

“Dairy Farm has for some time been looking for opportunities to participate in the large and high growth Chinese market,” Graham Allan, chief executive officer of Dairy Farm, said in a statement to the London Stock Exchange. “This strategic partnership with Yonghui provides an attractive way to do that.”

Dairy Farm, which runs more than 5,800 supermarkets and health and beauty stores as well as other retail outlets across Asia, will also collaborate with Yonghui in areas including procurement, fresh food processing and store development, according to the statement. Yonghui Superstores operated 288 hypermarkets and supermarkets across 17 provinces as of end-2013, it said.

The hypermarket industry in China is forecast to grow 39 percent to 862 billion yuan in 2016 from last year, according to researcher Euromonitor International. The purchase of the Yonghui stake, Dairy Farm’s largest deal ever according to data compiled by Bloomberg, comes as a slowing economy and increased competition prompt consolidation in China’s retail industry.

Regionalized Market

Fujian province-based Yonghui is China’s fifth-largest hypermarket company with a 4.6 percent market share last year. China Resources Enterprise Ltd. and Sun Art Retail Group Ltd., a joint venture between Taiwan’s RT-Mart and Groupe Auchan SA, are the largest with 14 percent each, according to Euromonitor’s data.

“Although China’s grocery retail market is very regionalized and competitive, Yonghui has done well over the last three years,” said Zhibin Yeo, an analyst with CIMB Securities Singapore. “This buyout gives Dairy Farm exposure to a growing China grocery retail market.”

The investment also allows the Dairy Farm to diversify its sales as the company faces challenges in a competitive Southeast Asian market, Yeo said.

Tesco Plc, the largest U.K. retailer, said in October it would pay about $558 million to merge its more than 130 stores in China into a joint venture with Hong Kong-listed China Resources Enterprise. The same month, Wal-Mart Stores Inc. said it would add as many as 110 stores from 2014 to 2016 in China, while shutting some outlets and remodeling dozens more as the world’s largest retailer overhauls its business in the country.

Shares of Yonghui were suspended from trading in Shanghai since Aug. 6, after rising 10 percent to 7.31 yuan since the start of the year. The benchmark Shanghai Composite Index increased 4.8 percent over the same time period.

The Singapore-listed shares of Dairy Farm, which operates the Wellcome supermarket chain in Hong Kong and 7-11 convenience stores in Singapore, Hong Kong and Guangdong province, ended 1.7 percent higher yesterday at S$10.17, extending this year’s gain to 7.1 percent.

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