SYDNEY (BLOOMBERG) — China Mengniu Dairy Co agreed to buy organic infant formula maker Bellamy’s Australia Ltd for A$1.5 billion (S$1.35 billion), securing a premium brand in one of the fastest-growing segments of the dairy market.

The Hong Kong-based firm offered A$13.25 per share on Monday (Sept 16) for Bellamy’s, a sizable 59 per cent premium to the stock’s last closing price. The Tasmania-based company’s board unanimously recommended the offer.

The deal, which is subject to approval from Australia’s Foreign Investment Review Board, would hand China’s second-largest dairy producer a trusted formula brand as it seeks to wrest back market share from global rivals. Bellamy’s has been producing formula in Australia since 2004 and is a stalwart of supermarket shelves there, part of the appeal for Mengniu with Chinese consumers still wary of local manufacturers after a tainted baby milk scandal more than a decade ago.

The deal will help Mengniu extend its portfolio into premium products after it acquired control of lower-end maker Yashili International Holdings Ltd in 2013, according to UOB Kay Hian Ltd analyst Robin Yuen.

“It gives them a complete product portfolio across lower and higher-end products,” said Yuen. “Bellamy’s is a very strong and internationally recognized brand.”

Bellamy’s shares surged as much as 56per cent to A$12.98 in Sydney, before pulling back to trade at A$12.89 as of 12:51pm local time. Mengniu fell more than 4 per cent in early Hong Kong trading, amid a 1.3 per cent drop in the Hang Seng Index.

Mengniu has been eyeing overseas acquisitions as China’s appetite for milk and infant formula grows with its middle class. The company offered to buy out China Modern Dairy Holdings Ltd. for HK$6.92 billion (S$1.2 million) in 2017, gaining a plant in New Zealand, the world’s biggest exporter of dairy. Mengniu’s chief rival, Inner Mongolia Yili Industrial Group Co, bought New Zealand’s Westland Co-operative Dairy Co in July.

The premium offered and a lack of specifics on how Mengniu will integrate Bellamy’s likely fueled the Chinese company’s stock drop, said Lei Yang, an analyst at China Galaxy International Financial Holdings in Hong Kong. But “strategically, it’s a good move” that will help Mengniu narrow its sales gap with Yili, he said.

AUSTRALIAN EXPOSURE

Mengniu’s chief executive officer Lu Minfang said Bellamy’s Australian operations and supply chain were critical to his company. “Our sales growth ambitions for Bellamy’s in Australia, and the broader Asia-Pacific region, will see investment in the local dairy industry,” he said in a statement on Monday.

China has been seeking to boost its local baby formula industry and restore confidence after the milk scandal in 2008 killed six children and poisoned 300,000 others. It will support domestic dairy producers in acquiring or setting up overseas bases, encourage foreign dairy firms to invest in China, while tightening regulations on milk-powder imports and online sales platforms.

The deal, which includes A$12.65 per share in cash and a 60 Australian cents special dividend paid by Bellamy’s prior to implementation, is subject to a shareholder vote in December and aims to close by year’s end.

Despite the large premium, the offer represents a potential bargain for Mengniu. Shares in Bellamy’s have fallen from a March 2018 closing-level peak of A$22.52, amid increased competition and delays in gaining a license from China’s State Administration for Market Regulation to sell organic formula in the nation.

The delay hurt the company’s full-year profit, which declined 36per cent to A$30.1 million, and Bellamy’s pushed its medium-term target of A$500 million annual revenue beyond fiscal 2021. Bellamy’s is the most-shorted stock on Australia’s benchmark index, with a little over 30per cent of the free float held by bears, according to data compiled by the Australian Securities and Investments Commission.

“Mengniu is a preeminent dairy company in China and an ideal partner for our business,” Bellamy’s Chief Executive Officer Andrew Cohen said in the statement. “It offers a strong platform for distribution and success in China, and a foundation for growth in the organic dairy and food industry in Australia.”

Bellamy’s still makes about 70per cent of its revenue from the Australian market, with overseas sales about 27 per cent, according to company data compiled by Bloomberg. While foreign infant formula is sold in China, consumers have sought out niche brands like Bellamy’s and a2 Milk Co on e-commerce platforms to ensure authenticity, with so-called daigous – Chinese shoppers that buy the products in their home markets – selling them at a premium on portals like Taobao and JD.com.