KKR takes stake in Chinese milk producer with $150m investment

Financial Times | June 16 2009

By Sundeep Tucker in Hong Kong

Kohlberg Kravis Roberts (KKR), the US private equity fund, yesterday confirmed a landmark investment in a Chinese milk producer and unveiled aggressive expansion plans for the company.

The deal is the largest of its kind involving a global private equity group and a dairy producer and comes as China seeks to modernise a fragmented industry whose reputation was badly dented following last year's melamine scandal.

KKR said that it had completed a series of investments, understood to total about $150m, in Ma Anshan Modern Farming, otherwise known as Modern Dairy, a company based in China's central province of Anhui.

David Liu, head of KKR Greater China, told the Financial Times that the US fund now owned a "significant minority stake" in the company. KKR has not previously commented on the investment.

Modern Dairy operates seven nationwide production facilities with total annual capacity of 150,000 tons of raw milk.

KKR said that the company planned to build or acquire up to a further 30 large-scale farms over the next few years.

Mr Liu said that KKR had brought in both capital and expertise to help Modern Dairy develop world-class facilities. "These will provide high quality milk production that will benefit China's consumers," he said.

Foreign investment into China - especially by private equity funds - is often treated with suspicion. However, KKR's support of the beleaguered dairy sector is being well received by mainland authorities.

Last year it was revealed that 22 dairy companies had sold products that contained melamine, an industrial chemical that boosts protein levels but in high doses can cause kidney stones.

More than 50,000 children fell ill and four infants died. Modern Dairy was not involved in the scandal.

The scandal led to worldwide recalls of foods that contained Chinese dairy ingredients and tarnished the image of Chinese products well beyond the dairy industry. It also highlighted gross inefficiencies in quality control of China's fragmented and rapidly growing dairy industry.

Most raw milk comes from China's 1.3m farmers who typically own between five and 10 cows each. They supply to middlemen, who were blamed for adulterating the milk to boost profits.

The yield of the average Chinese cow is about half of that produced by modern farms in Canada or Australia, a gap that KKR believes can be closed with the introduction of modern techniques.
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