KKR And CDH Sell Down China Modern Dairy In Profitable Exit

KKR & Co. and CDH Investments have agreed to sell their stakes in China Modern Dairy to China Mengniu Dairy in a potentially profitable partial exit.

Hohhot, Inner Mongolia-based Mengniu Dairy is forking out approximately US$410 million to increases its shareholding in Modern Dairy from 1% to 28%, becoming the single largest shareholder of Anhui province-headquartered Modern Dairy.

The sellers are Advanced Dairy Company and Crystal Dairy Holdings, two companies controlled by private equity firms KKR and CDH, respectively. After the partial exit, KKR will hold roughly 3.6% in Modern Dairy. CDH will maintain another 1.5%.

KKR and CDH initially bought stakes in Modern Dairy in 2008. The specific terms of their investments are not clear, but KKR reportedly paid roughly US$150 million for a 34.5% stake of Modern Dairy, then named Ma Anshan Modern Farming Co.

The valuations were favorable to the private equity firms as the Chinese dairy industry was rocked by scandals of milk containing melamine that killed infants.

In 2010, Modern Dairy completed an IPO in the Hong Kong Stock Exchange. KKR sold down its stake to 24% in the US$448 million IPO.

With the latest partial exit, KKR and CDH are estimated to have generated a three times return on their original investments.

What is unique about the latest sale to Mengniu is its price. KKR and CDH are selling at HK$2.45 per share, a 12% discount to the closing price before the deal was announced. The norm is for the purchaser to pay a premium.

Analysts say that the two private equity firms accepted the discount to maintain good relationships with COFCO (China National Cereals, Oils and Foodstuffs Corporation), China’s giant state-owned food processing conglomerate that is Mengniu’s biggest shareholder.

"The increase of Mengniu’s stake in Modern Dairy is to secure both quality and quantity of raw milk sources, as well as to further capitalize on our competitive edge in high-end milk source," Sun Yiping, CEO of Mengniu, says in a statement.

Founded in 2005, Modern Dairy is currently the largest raw milk supplier to Mengniu, operating 22 large-scale dairy farms across China with a geographic footprint that coincides with Mengniu’s processing facilities. The company has total production capacity of over 700,000 tons of raw milk per year.

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