Paris-based multinational dairy and water conglomerate Danone has reached a preliminary agreement with Chinese dairy Yashili to sell its Dumex China infant formula business and use the proceeds to increase its stake in Mengniu.

Yashili, 25% owned by Danone and one of China’s top 10 infant formula makers by sales, said in a filing to the Hong Kong bourse it plans to acquire Dumex Baby Food Co, a wholly owned Danone Asia Unit for an undisclosed sum.

Danone will use the proceeds to increase its 9.9% share in China’s second largest dairy company China Mengniu Dairy, which owns an indirect 51.04% in Yashili.

The deal come as competition grows in the world’s largest infant formula market, with both Chinese and foreign firms seeking to shore up market share and locate new expansion channels. China is Danone’s fourth largest market accounting for around 7% of its group sales in 2014.

Chinese sales of Dumex were hit hard by the 2013 Fonterra botulism scare, when three batches of whey protein concentrate potentially contaminated with Clostridium botulinum entered the food chain.

Tests later revealed that the contaminant was non toxic, but this was too late for Dumex, which had already pulled infant formula from shelves in China, Hong Kong, Thailand, Cambodia, Laos, Malaysia and Singapore as a precaution.

Danone terminated its supply contract with Fonterra and launched legal action, which is ongoing.

Danone said: “Despite the overall positive environment, Dumex brand products remained well below levels observed in early 2013, hit hard by the false alert raised by Fonterra and by the shift in consumer preferences from supermarkets to both online and specialized distribution.

“Danone has decided to reallocate resources in this market and subsequently to revise downward long term sales projections for Dumex in China.

“Therefore Danone impaired the brand and certain assets in China for a total amount of €398 million at June 30 2015”

Financial results

In it first half results, the French dairy giant reported group sales of €11.3bn, a 4.6% like for like increase on the €10.4bn it recorded in H1 2014.

Danone’s largest division, Fresh Dairy Products, reported sales of €5.6bn, down 0.4% from €5.6bn reported in H1 2014. This was offset, however, by a sales boost from its early life nutrition, medical and water divisions.

Its early life nutrition unit, which includes the Dumex brand, reported sales of €2.4bn for the first six months of the year, up by 11.3% from €2bn.

Revenue from its medical nutrition business increased 4.3% from €682m to €780m for the six month period.

Meanwhile, Danone’s water division reported sales of €2.5bn, an increase of 9.5% on the €2bn reported in the first half of 2014.