October 31, 2013
China Modern Dairy becomes potential target for consolidation
After China Mengniu Dairy bought a 26.9% stake in the company in May this year, China Modern Dairy, which is the largest producer of raw milk in China, is viewed as one of the top-quality players but it has also become a potential target for a consolidation.
After having a daily turnover of just US$3 million to US$4 million a few months ago, China Modern Dairy is now routinely seeing US$18 million to US$19 million worth of its shares change hands every day.
Following the share price jumped 80% in three months, founding shareholders sell a 5.2% stake and investors are keen to buy. The three sellers will still own a combined 26.7% after this transaction, which makes them the second largest owner after Mengniu. However, while they own shares on behalf of the former founders they are no longer involved in the day-to-day operations of the company and are considered independent shareholders.
Mengniu holds 28% following its acquisition of a 26.9% stake from KKR and CDH. The two private equity firms invested in China Modern Dairy in 2008 and 2009 respectively, and KKR's involvement in particular has been viewed as having had a positive influence on the quality of the operations.
China Modern Dairy was KKR's first investment into China's consumer sector. Its stake dropped to 3.5% following the divestment in May, while CDH's holdings fell to 1.5%.
In September, a company owned by KKR China Growth Fund and CDH agreed to set up a joint venture (JV) with China Modern Dairy to construct and operate two large-scale dairy farms that will breed, raise and sell dairy cattle; produce, process and sell raw milk; produce processed milk under OEM contracts; and sell fertilisers.
Through Success Dairy, KKR and CDH will own 82% of the JV while Modern Dairy will own the remaining 12%. Under the terms of the agreement, the partners will invest US$140 million over the next 18 months in the JV.
According to KKR, the new JV farms will buy China Modern Dairy's excess cows generated through natural herd growth. There is also an arrangement for China Modern Dairy to buy back the JV farms in three years, which will boost its long term growth.
These developments took place against the backdrop of recent announcement by the Chinese government of plans for an industry consolidation that aims to create a handful of high-profile local brands and to improve the quality of the country's milk products.
