By Denny Thomas and Donny Kwok
HONG KONG (Reuters) - France's Danone SA
The 486 million euro investment by the world's biggest yoghurt maker will see its effective holding in Mengniu rise to 9.9 percent from 4 percent, making it the Chinese company's second-biggest shareholder.
Mengniu's shares rallied as much as 9.5 percent to an all-time high of HK$40.35 before much of those paring gains.
Booming Chinese demand for dairy products has sparked a raft of M&A and IPOs in China's dairy sector. Food-safety scares have also boosted demand for foreign baby milk formula, pushing local dairy firms to increase ties with foreign makers.
Sales of dairy products are expected to nearly double from 2012 to 2017 to about $89 billion, according to estimates by business consulting firm Frost & Sullivan.
Danone, the maker of Bledina baby food and Volvic water, formed an alliance with Mengniu in May 2013, under which the companies agreed to produce and sell chilled yoghurt products in China.
Under the new agreement, Danone and COFCO Dairy Investment, a venture with China's state-owned COFCO, will subscribe to a reserved rights issue by Mengniu at HK$42.5 per share, a 15.3 percent premium to Mengniu's previous close.
COFCO, Danone and dairy cooperative Arla Foods
Danone has long aimed to establish a major presence in China. Its first joint venture with China's largest beverage company, Hangzhou Wahaha Group Co, fell apart in 2009 after 13 years.
China's dairy industry is dominated by local companies including Modern Dairy, China Huishan Dairy Ltd <6863.HK> and YST Dairy <1431.HK>. Foreign players have taken a significant role in niche markets such as milk powder after a 2008 food safety scandal.
Mengniu shares were trading 1.8 percent higher at HK$37.50 by 0300 GMT, while the Hang Seng index <.HSI> was up 1 percent.
Mengniu plans to use the proceeds to cut down debt. Deutsche Bank
To see the statement please click (http://link.reuters.com/wuq76v) ($1 = 7.7564 Hong Kong dollars) ($1 = 0.7312 euros)
(Additional reporting by Elzio Barreto; Editing by Edwina Gibbs)