KKR, CDH back Chinese milk production

The private equity firms will invest a further $140m into a joint venture with Modern Dairy to build new large-scale dairy farms in China.

Kohlberg Kravis Roberts and CDH Investments have entered into a joint venture with their former portfolio company China Modern Dairy to build large-scale dairy farms in China to boost milk production, according to a joint company statement. 

The trio will invest a total of $140 million into the joint venture over the next 18 months, with KKR, CDH and Modern Dairy holding 61.5 percent, 20.5 percent and 18 percent of the JV respectively. The deal marks KKR's first majority investment in China and was made from its China Growth Fund, not its $6 billion Asia Fund II, which closed earlier this year. 

Over the next two years, the joint venture will build two 10,000-cow farms located in Shanghe county of Eastern China’s Shandong province, the statement said. The firms noted good climate conditions for dairy farming and strong local government support as reasons for the location. 

The agreement also holds an arrangement for Modern Dairy to buy back the farms in three years, identifying a clear exit route for the two private equity investors, who have invested heavily in China’s food sector in recent years. 

The management of Modern Dairy saw a need arising from increasing demand for safer and healthier milk. The solution was a large-scale dairy farm 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.

David Liu, head of China, KKR

In 2008, KKR invested about $150 million in Modern Dairy between 2008 and 2009 in a co-investment with CDH, shortly after a July 2008 tainted milk scandal involving a different company in China, where six infants died and a further 294,000 were reportedly taken ill. 

Since then, the business has increased its herd from 24,000 cows and three farms to about 180,000 cows and 22 farms. The firms exited the business via a series of IPOs in Hong Kong during 2010 and 2013, with KKR gaining a 2.9x exit multiple on its investment, a source close to the matter told Private Equity International earlier. 

“The management of Modern Dairy saw a need arising from increasing demand for safer and healthier milk. The solution was a large-scale dairy farm 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,” David Liu, head of KKR China, said.

CDH has also been active elsewhere in China’s food sector, being a major shareholder in Shuanghui International. CDH owns about 33 percent of the Chinese pork producer, which is currently involved in what would be the largest ever US acquisition by a Chinese company – a $7.1 billion deal for pork producer Smithfields Group, PEI reported earlier. 

CDH is expected to exit its investment in Shuanghui in the near future, having initiated the Smithfields acquisition to make the public offering more attractive, according to industry sources.