KKR leads $270m buyout of COFCO Meat

The firm leads Baring, Hopu and Boyu to capitalise on widespread food safety concerns in China.

The private equity industry is tackling issues in China’s meat industry, with a consortium teaming up to invest in one of China’s largest state-owned food and agriculture businesses, COFCO Group, according to a joint statement.

The consortium, which includes Kohlberg Kravis Roberts, Baring Private Equity Asia, Hopu Investments and Boyu Capital, have created a strategic partnership with COFCO’s pork and poultry subsidiary, COFCO Meat, to build and manage large-scale industrialised pig farms and meat processing plants in China.

Financial details of the investment were not disclosed, but a source close to the deal told Private Equity International that the total deal value is $270 million, with KKR investing $150 million and the other firms making up the balance. It is an all-equity transaction. 

The consortium will own 62 percent of COFCO Meat following the transaction, the source added, but emphasised that this was solely in economic terms. COFCO will remain the controlling shareholder in terms of driving the business, but hold an economic stake of 38 percent.

COFCO Meat produces, processes and distributes meat in China, as well as importing and exporting. The business is one of China largest pig producers and aims to provide safe and high-quality meat to consumers, according to the statement.

The company markets its fresh and processed meat products under the brands Joycome and Maverick.

“Meat is the single-largest food category in China's diet, and meeting this demand is a critical link and a natural extension of our company's value chain. Chinese consumers demand of COFCO to promote the meat industry and provide safe meat products. Bringing in the four strategic investors is an action by COFCO to diversify our equity ownership and enhance our corporate governance,” Ning Gaoning, chairman of COFCO Group, said in a statement.

China accounts for more than 50 percent of global pork consumption, but large-scale farms in the country contribute less than 1 percent of total domestic supply, according to data from the US Department of Agriculture and the China Animal Industry Yearbook.

Large-scale farms are also expected to increase more than six-fold by 2020 due to higher standards of food safety and quality control, as well as greater operational efficiency.

Like the dairy industry in China, meat has drawn widespread attention due to various scandals relating to unsafe or tainted food products over recent years.

Private equity firms have jumped at the chance to help improve these companies’ positions in the market, offering international food safety expertise, as well as offshore distribution chains and food testing capabilities, industry sources say.

The KKR-led consortium will focus first on improving the supply chain to COFCO Meat, using the first six months to completely focus on ensuring that the products are 100 percent safe. The investors will recruit American, Canadian and Danish food experts to help implement best practices in the business.

The next step will be to evaluate the supply chain, so the meat cannot be tainted at any level from production to sales. Hopu and Boyu are particularly expected to provide key relationships to help with finding the right real estate and land to farm pigs in the most effective and healthy environment possible.

Once these things are in place, the firms can focus on re-educating and gaining the trust of consumers.

“[COFCO] obviously does not need the cash, but they had brought two of KKR’s businesses before – Mengniu and Modern [Dairy] so they saw that they were a value-added partner,” PEI's source said. 

“This is the same thesis on dairy, except on meat,” he added.

KKR exited its investment in China Modern Dairy in a strategic sale to COFCO-owned China Mengniu Dairy Company in May last year for HK$2.41 billion (€237 million; $310 million), a source close to the matter confirmed to PEI earlier. This, with the firm’s previous sale of shares, represented a gross cash-on-cash return of 2.9x. 

KKR had also previously been an investor in Mengniu, while Hopu has previously teamed with COFCO’s agricultural business in a joint venture called Noble Agri.

The firm expects the business to grow between 3 and 5 times over the next five years if they can successfully implement better food safety standards and demonstrate to Chinese consumers that COFCO Meat is supplying a higher quality product.