China Mengniu Dairy is set to purchase a 75.3% stake in Yashili International for $1.6bn from its controlling shareholders, Zhang International Investment and CA Dairy Holdings.
Yashili is currently one of the largest domestic pediatric milk formula producers and retailers in China, carrying the Yashili and Scient milk powder brands.
Its product lines address the health concerns of all age groups from infants to the elderly. In recent years, Yashili has increased its commitment to R&D in pediatric milk formula and sourced raw milk from overseas suppliers, mainly from New Zealand.
The move is aimed at rebuilding Mengniu's reputation and secure safe supplies of baby formula in China.
Mengniu has offered a HK$3.50 ($0.45) per share in cash or HK$2.82 ($0.36) and 0.681 share in a private company set up by Mengniu for the sole purpose of holding shares in Yashili.
China Mengniu Dairy chief executive officer Sun Yiping said that this acquisition will have an enormous strategic significance to the shareholders of both companies.
"With the huge room for growth in China's pediatric milk formula market, the partnership with Yashili, one of the most successful milk powder brands in China, will greatly strengthen both companies' business platform to offer consumers with more choices in dairy products that are safe, healthy and of highest quality," Yiping added.
"It will generate important synergies for the development of the two companies, thereby capture the rapid growth of pediatric milk formula market in China.
"We will maintain Yashili as an independent operating platform upon the completion of the offer. In the future, we will introduce expertise both from Mengniu and international partners to enable Yashili to develop into a more internationalised pediatric milk formula brand."
Yashili chairman and Zhang International director Zhang Lidian said: "Zhang International is looking forward to working closely with the Mengniu team to create a leading platform for quality milk powder in China."
The general offer is subject to customary conditions and Mengniu's shareholders approval.
Following the completion of the transaction, Zhang International will retain 10% interest in Yashili.