KKR, CDH invest in $140m China dairy farm joint venture
KKR has completed its first majority investment in China, partnering with CDH Investments and China Modern Dairy in a $140 million greenfield farming joint venture that will deliver premium raw milk to domestic consumers.
KKR and CDH have also been investors in Modern Dairy since 2008. They reduced their holdings when the company went public in 2010 and again earlier this year when China Mengniu Dairy, already a minority shareholder and long-standing off-take partner of Modern Dairy, increased its stake.
The new joint venture is described as a continuation of this partnership, recognizing that the growth in demand for clean dairy products in China still outpaces that of quality raw milk supplies.
The joint venture plans to build two 10,000-cow farms over a two-year period, to be located in Shandong province on China's eastern seaboard, which has suitable climatic conditions for dairy farming. The 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 farms in three years.
KKR will hold 61.5% of the joint venture, with CDH and Modern Dairy taking 20.5% and 18%, respectively. KKR's investment will come from its $1 billion China growth fund.
"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," Julian Wolhardt, China regional leaders at KKR, said in a statement.
The two private equity firms' original investment in Modern Dairy came in the wake of China's melamine scandal when tainted milk products cost the lives of six infants and hospitalized hundreds more. The contamination arose from poor oversight of the fragmented supply chains through which Chinese dairy products manufacturers sourced their milk.
Modern Dairy was intended to become a milk-producing outfit that operated to global standards. Experts were brought in from the US and Australia, and KKR's Capstone unit spent 16 months on the ground, focusing on operational efficiencies and making improvements across feed purchasing, breeding, disease reduction and risk prevention.
The company's herd has grown from 24,000 cows and three farms in 2008 to approximately 180,000 cows and 22 farms today. It has a total annual production capacity of more than 700,000 tons of raw milk.
According to Euromonitor International, Chinese dairy consumption has seen compound annual growth of 10% over the past five years. The premium product market share has increased from 10% to 19% during this period, driven by a combination of rising household incomes, ongoing food safety concerns and increasing health awareness.
The country's per capital liquid milk consumption is still less than 10 kilograms per year, compared to 32 kg in Japan and 78 kg in the US.
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