Global private equity firm KKR & Co. is betting on China’s continued demand for safe milk, announcing Tuesday that it would lead a US$140 million joint venture with Chinese private equity firm CDH Investments and China Modern Dairy Holdings Ltd. to build two dairy farms in the world’s most populous nation.
News of the development of the two farms, which will each be home to 10,000 cows, comes a month after China’s quality watchdog asked importers to recall milk products supplied by New Zealand’s Fonterra Co-Operative Group Ltd. after the dairy exporter warned that some of its products might have been tainted with a substance that could cause severe food poisoning.
It also follows a summer where the infant-formula makers weathered scrutiny from Chinese regulators. Mead Johnson Nutrition Co.'s China unit, Abbott Laboratories and Danone SA are being fined for alleged anticompetitive practices. Dumex Baby Food Co., a subsidiary of Danone, is also launching a probe of its infant- formula marketing after China’s state broadcaster alleged the formula maker pays hospital staff to use its products and influence sales.
“The growing demand for premium dairy products is driving strong demand for high quality milk from large scale farms,” Modern Dairy’s Chief Executive Gao Lina said in a statement. “We have chosen once again to partner with KKR and CDH in a new venture to help meet Chinese demand for safe and high quality milk.”
Modern Dairy, was listed on the Hong Kong Stock Exchange in 2010, two years after KKR and CDH first invested in the company. Its herd includes around 180,000 dairy cows across 22 farms which produce over 700,000 tons of raw milk per year.
KKR’s Head of China David Liu said in a statement that Modern Dairy’s management believes there’s a gap in supply following increasing demand for “safe” milk. “The solution was large-scale dairy farms that incorporated global best practices. Today, food safety remains a top priority and this new investment helps increase the supply of premium raw milk in China,” Mr. Liu said.
The new farms will be built over two years and will be located in the Shanghe county in Eastern China’s Shandong province, the joint venture partners said. Cows will be sourced as Modern Dairy’s existing herd reproduces. KKR’s China Growth Fund, CDH and Modern Dairy will own stakes of 61.5%, 20.5% and 18% respectively in the deal which will allow the company, which is based in Anhui province, to acquire the 82% of the venture it doesn’t own, in three years.
The deal comes as CDH, which manages more than US$10 billion on behalf of investors including China’s National Social Security, inches towards a final close of its US$2 billion fifth fund. It also comes as China Huishan Dairy Holdings Co., which uses cows imported from Australia to produce milk, gears up for a listing in Hong Kong on Friday, after raising US$1.3 billion in the city’s largest initial public offering in four months.
According to Euromonitor, China’s total dairy consumption has been growing at a compound annual rate of 10% over the past five years, with premium dairy product consumption growing to 19% of the market from 10%, due to concerns over the quality of products such as infant formula. The nations per capita liquid milk consumption is less than 10 kilograms a year, compared to 32 kilograms and 78 kilograms in Japan and the United States, respectively.