Carlyle to exit Yashili stake to China Mengniu Dairy

According to a regulatory filing, Mengniu will buy 2.7 billion shares - representing 75.3% of Yashili - from majority shareholder Zhang International and CA Dairy, an entity owned by Carlyle Asian Partners III and CAP III Co-Investment.

The overall deal would be worth HK$12.5 billion. Mengniu is offering HK$3.5 apiece - a 9.4% premium over Yashili's latest closing price of HK$3.20 - in cash. There is also a second option of HK$2.82 in cash per share plus HK$0.681 per share in a private company set up by Mengniu for the purpose of holding shares in Yashili.

Zhang International agreed to the cash-and-shares combination offer to retain 10% of interest in the baby formula manufacturer, but Carlyle has opted for a full exit.

The PE firm acquired a 17.3% stake in Yashili in September 2009 for $95.15 million. The company went public in Hong Kong in 2010, raising $348 million, and Carlyle increased its stake to 24.39%.

"Carlyle has worked closely with Yashili's management team in the past several years to facilitate the company's internationalization, including setting up the Food Safety & Quality Assurance Committee and supply chain initiatives in New Zealand," said Eric Zhang, managing director at Carlyle.

The private equity firm also hired safety experts in an effort to build consumer confidence in its products, as consumer confidence in China's dairy industry shrank following the 2008 melamine scandal. Sales dropped across the board in response to the incident, which saw tainted infant formula claim the lives of six children and hospitalize more than 800 others.

Although Yashili was not linked to any cases at the time, the company still felt the repurcussions. In recent years, it has increased its commitment to R&D in pediatric milk formula and sourced raw milk from New Zealand. It invested RMB1.1 billion ($142 million) to establish a manufacturing facility in New Zealand.

This is the second private equity dairy exit in the last few weeks, after Mengniu agreed to buy 26.9% of China Modern Dairy for HK$3.18 billion ($410 million). The transaction facilitates the partial exit of KKR and CDH Investments, generating a 2.9x gross return.

Driven by rising disposable incomes and low confidence in food safety, Chinese consumers are willing to pay a premium for quality. The opportunities for PE in terms of creating value exist all along the supply chain, especially in dairy industry.

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• Topics
• Greater China
• Exits
• Consumer
• KKR
• The Carlyle Group
• CDH Investments Management
• Exit
• Consumer
• Olympus Capital Holdings Asia
• Growth capital