KKR gains 2.9x from China Modern Dairy exit

In a $310m deal, the firm has exited the majority of its holding in the Chinese dairy product manufacturer after making significant operational improvements.

Kohlberg Kravis Roberts has exited its investment in China Modern Dairy in a strategic sale to China Mengniu Dairy Company, according to a joint statement from the buyer and the portfolio company. KKR retains 3.5 percent interest in the business. 

KKR’s stake went for HK$2.41 billion (€237 million; $310 million), a source close to the matter confirmed to Private Equity International. This, with the firm’s previous sale of shares, represents a gross cash-on-cash return of 2.9x. 

KKR listed the company on the Hong Kong Stock Exchange in 2010 alongside China-focused CDH Investments, raising $448 million. The firm sold 222 million shares in the IPO, roughly one third of its original investment, and received $79 million in proceeds, PEI reported earlier.

In addition to buying KKR's stake, Mengniu also acquired a stake from Crystal Dairy Holdings, increasing its interest in the business to 28 percent from 1 percent, the statement said. Mengniu is now the largest shareholder in the business, with shares selling at HK$2.45 reportedly equating to a total deal value of $410 million. 

Modern Dairy, headquartered in China’s eastern province of Anhui, is a dairy farming company founded in 2005. The business says it hopes to create a professionally managed, large-scale dairy farming company that meets the public’s demand for safe and high-quality milk and bring international best practices to dairy farming in China. 

KKR invested about $150 million in the business between 2008 and 2009, shortly after the July 2008 tainted milk scandal when six babies were killed and a further 294,000 reportedly taken ill in China. The cause was proved to be contamination by the industrial chemical melamine, which was eventually traced back to former Chinese dairy products company Sanlu.

Chinese consumers becoming increasingly diligent
about food safety standards

Today, it’s 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. Between 2008 and 2011, top line revenue at the Chinese dairy farming company grew 393 percent to RMB 1.4 billion (€172 million; $222 million), while EBITDA rose 520 percent to RMB 459 million, according to the company. More recently, the company reported that net profits for the 12-month period ending 30 June 2012 were RMB 396 million, a 77 percent increase. 

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

KKR is one of the world’s largest private equity firms with about $78 billion in assets under management, according to PEI’s Research & Analytics division. The firm has also raised $6 billion for its second Asia Pacific vehicle, which is expecting a final close imminently, according to industry sources.