September 27, 2013

KKR, CDH, Modern Dairy set up dairy joint venture in Shandong

 

 

 

KKR, CDH and Modern Dairy announced on September 23 the formation of a new joint venture, which is designed to deliver premium raw milk to Chinese consumers.

 

Under the terms of the agreement, KKR, CDH and Modern Dairy will hold 61.5%, 20.5% and 18.0% stakes respectively. The three companies will invest US$140 million over the next 18 months to build two large-scale dairy farms in China.

 

The new joint venture plans to build two 10,000-cattle farms over a two-year period. The farms will be located in Shanghe county of Shandong province, which has suitable climate conditions for dairy farming and strong support from the local government.

 

The new joint venture farms will buy Modern Dairy's excess cattle generated through natural herd growth. There is also an arrangement for Modern Dairy to buy back the JV farms in three years, which will boost its long term growth.

 

The transaction is subject to customary approvals and is expected to close in the fourth quarter of 2013. KKR will be making the new investment through its China Growth Fund.

 

"The growing demand for premium dairy products is driving strong demand for high quality milk from large scale farms," said Gao Lina, CEO of Modern Dairy. "Following our successful partnership in Modern Dairy, we have chosen once again to partner with KKR and CDH in a new venture to help meet Chinese demand for safe and high quality milk," added Gao.

 

David Liu, Member of KKR and Head of KKR China said: "The management of Modern Dairy saw a need arising from increasing demand for safer and healthier milk. The solution was large-scale dairy farm that incorporated global best practices. Today, food safety remains a top priority and this new investment helps increase the supply of premium raw milk in China."

 

Julian Wolhardt, Member of KKR, said: "We had a successful investment previously with Modern Dairy. With this new joint venture, we are following a successful model to work with an experienced local management team, using our capital, global resources and the operational value-add KKR brings to the partnership to help meet the growing demand."

 

KKR, a leading global investment firm, and CDH, an international asset fund manager, have previously invested in Modern Dairy in 2008. Since then, Modern Dairy has grown its herd from 24,000 dairy cattle and three farms to approximately 180,000 dairy cattle and 22 farms. In 2010, Modern Dairy completed an IPO on the Hong Kong Stock Exchange.

 

According to Euromonitor, China's total dairy consumption grew at 10% Compound Annual Growth Rate (CAGR) over the past five years, with premium dairy product consumption growing significantly faster than the overall market and increasing its market share from 10% to 19%, due to continued consumer concerns with food safety and increasing health awareness. 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.