Carlyle seals $1.6bn China dairy exit

The global private equity firm has sold its stake in Yashili International to China Mengniu, the same strategic buyer that acquired China Modern Dairy from KKR in May.

The Carlyle Group and joint controlling shareholder Zhang International Investment have sold their majority shareholding in Chinese baby-formula producer Yashili International to China Mengniu Dairy, according to a joint statement from the firms.

The total deal value was HK$12.5 billion (€1.2 billion; $1.6 billion), media reports estimated based on the confirmed share price. Carlyle would not comment on any financial details including the exit multiple. 

The statement said Mengniu offered shareholders the option of either HK$3.50 in cash, or HK$2.82 in cash with a 0.681 share in a private company it set up for the purpose of holding Yashili shares. The offer price represents a premium of approximately 9.4 percent over the closing price of HK$3.20 per share on the last trading date prior to 13 June 2013, when trading in the firm's stock was suspended on the Hong Kong Stock Exchange. 

Carlyle invested an undisclosed amount in the business in 2009 and Carlyle and Zhang together owned 75.3 percent of all Yashili shares. The firms have irrevocably undertaken to accept the offer, which represents a full exit for Carlyle, but following the transaction Zhang will retain a 10 percent interest in the company.

“Carlyle has worked closely with Yashili’s management team in the past several years to facilitate the company’s internationalisation, including setting up the Food Safety & Quality Assurance Committee and supply chain initiatives in

Chinese dairy companies providing exits
for private equity firms

New Zealand. We are pleased to see the company has developed steadily over the years,” Eric Zhang, managing director of Carlyle, said in the statement.

The food safety advisory committee is the first of its kind in the Chinese dairy industry, Carlyle said earlier, and demonstrates the continuing focus investors have on improving the standards of dairy products in China. 

Similarly, in May, Kohlberg Kravis Roberts sold its investment in China Modern Dairy to Mengniu for HK$2.41 billion, Private Equity International reported earlier. This, with the firm’s previous sale of shares, represented a gross cash-on-cash return of 2.9x. 

KKR invested about $150 million in the business between 2008 and 2009, around the time of a tainted milk scandal in China that resulted in six infant deaths and hundreds of thousands taken ill. Modern Dairy had no involvement in the scandal, but nonetheless the Chinese public lost confidence in all domestic milk producers.

Today, Modern Dairy is the largest dairy farming facility in China, both in terms of herd size and, according to the China Dairy Association, raw milk production, churning out 1.8 million tonnes of milk per year.

KKR’s investment in Modern Dairy also won the 2012 PEI Operational Excellence Award in Asia for the Manufacturing & Industrial category. KKR Capstone, the in-house team dedicated to improving the operations of portfolio companies, spent 16 months working alongside Modern Dairy’s management team. During that time KKR built-out company management, improved best practices and formed strategic partnerships in China, the judges in the Operational Awards said.