Under the terms of the agreement, KKR, CDH and Modern Dairy will invest US$140 million over the next 18 months to build two 10,000 cow farms over a two-year period. The farms will be located in Shanghe county of Eastern China’s Shandong province.
KKR, CDH and Modern Dairy will hold 61.5%, 20.5% and 18.0% stakes respectively. KKR will be making the new investment through its China Growth Fund.
The new joint venture farms will buy Modern Dairy’s excess cows generated through natural herd growth. There is also an arrangement for Modern Dairy to buy back the joint venture farms in three years.
The transaction is expected to close in the fourth quarter.
KKR and CDH have previously invested in Modern Dairy in 2008. Since then, Modern Dairy has grown its herd from 24,000 dairy cows and three farms to approximately 180,000 dairy cows and 22 farms.
In 2010, Modern Dairy completed an IPO on the Hong Kong Stock Exchange.
"The management of Modern Dairy saw a need arising from increasing demand for safer and healthier milk," says David Liu, head of KKR China. "Today, food safety remains a top priority and this new investment helps increase the supply of premium raw milk in China."
According to Euromonitor, China’s total dairy consumption grew at 10% compound annual growth rate over the past five years, with premium dairy product consumption growing significantly faster than the overall market. Premium dairy product consumption’s market share also expanded from 10% to 19%.
Despite the strong growth, China’s per capita liquid milk consumption is less than 10kg per year, compared to 32kg in Japan and 78kg in the United States.