Sequoia to invest $63m in Chinese milk producer

Joining KKR and others already invested in China's dairy sector, the PIPE deal will give Sequoia an 8.7% stake in Beijing-headquartered American Dairy.

Sequoia Capital China, the Chinese affiliate of the US venture firm, is the latest to seek out deals in China's diary sector. The firm will invest $63 million for a roughly 8.7 percent stake in New York Stock Exchange-listed American Dairy.

Sequoia’s investment, expected to close by month's end, comprises $47 million in equity as well as the conversion of a $16 million bridge loan to the company at the end of July. Under the agreement, American Dairy will issue additional shares to the firm if certain 2009 and 2010 earnings targets are not met, according to an American Diary statement.
The capital injection will boost the company’s growth capital and help it carry out long term strategic plans, Leng You Bin, American Dairy’s chairman and chief executive officer, said in the statement. It also gives the firm a seat on the company’s board.

American Dairy’s shares rose on the news to $29.55 per share this Wednesday from $27.79 per share on Tuesday, when the agreement was announced.

American Dairy operates in China through its subsidiary, FeiHe Dairy. The company produces and distributes milk powder, soybean, rice and walnut products across China. It has two dairy farms, six production facilities and a distribution network reaching more than 80,000 retail outlets throughout China.

Private equity firms are increasingly capitalising on opportunities in China’s diary industry. In July, Hopu Investment Management and state-backed enterprise COFCO reportedly invested about $800 million in China Mengniu Dairy Company for a combined 20 percent stake. In December 2008, Kohlberg Kravis Roberts invested $99.2 million for a minority stake in dairy farming company Ma Anshan Modern Farming.

In 2008, the industry was rocked by a scandal, which involved 22 Chinese diary farms selling produce containing an industrial chemical melamine. Melamine was allegedly added to milk to make it appear to have a higher protein content. A total of 296,000 children fell ill after the consumption of milk tainted with melamine, according to the Chinese government this January.