PE consortium to build hog farms with China’s COFCO Meat

The private equity consortium is said to be investing about $270 million for a 70% stake in COFCO Meat, with KKR accounting for the largest individual contribution at $150 million.

The deal represents a continuation of KKR's China clean food investment thesis, which previously focused on the dairy space.

In 2008, the PE firm partnered CDH Investments to back China Modern Dairy and create a milk-producing outfit that operated to global standards. They made partial exits when the business listed in 2010 and when China Mengniu Dairy increased its stake in 2013. KKR, CDH and Modern Dairy teamed up again last year to set up a greenfield farming joint venture.

COFCO Meat, which was set up in 2009, currently has about 17 hog farms with an annual capacity of 1.4 million head, although the sales amount to around 800,000 head. The objective is to increase capacity to 4.9 million head by 2018, which is likely to involve building at least 30 new farms. Individual farm size is constrained by bio-security considerations and COFCO Meat, one of China's top three hog producers, already operates facilities that are at the upper end of the scale.

Similar to Modern Dairy, additional international technology and expertise will be introduced to COFCO Meat's farms, with livestock professionals from the US and Canada likely to come on board with genetics technology sourced from Denmark. Efforts will also be made to develop the company's fresh and processed meat retail brands, which are distributed under the Joycome and Maverick names.

According to the US Department of Agriculture and the China Animal Industry Yearbook, China accounts for over 50% of global pork consumption, while large-scale farms with annual output of 50,000 head or more contribute less than 1% of domestic supply. Large-scale farms are expected to increase more than six-fold by 2020 due to their operational efficiencies and the increased emphasis on safety and quality.

"COFCO Meat is the right partner for the consortium with its strong commitment to food safety, leading market position and outstanding historical track record," said Julian Wolhardt, China regional leader at KKR, in a statement. "We look forward to fully utilizing our global resources and local expertise to assist COFCO Meat in setting the bar for food safety in China."

The ties between KKR and COFCO Group go back to the China team's investment in Mengniu in 2002 when with Morgan Stanley Private Equity Asia. COFCO was also on the Mengniu board and bought part of the PE firm's stake in the company.

According to a source familiar with the situation, Hopu and Boyu were brought in to leverage their relationships at government and regulatory level, given that land acquisitions will be a key part of COFCO Meat's expansion. However, Hopu can also claim to have strong links to COFCO, having invested in Mengniu alongside the agricultural conglomerate in 2009 and more recently backed a joint venture set up by COFCO and Noble Group.

Guy Cui, the managing director at Baring Asia who is responsible for the COFCO Meat investment, was formerly a partner at Hopu.

"The investment in COFCO Meat is an excellent example of the consortium's ability to invest in a diversified-ownership structure and support an important policy imperative to provide consumers with better food quality and safety," Cui said in the statement.

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• Topics
• Consumer
• Greater China
• Buyouts
• Industrials
• Consumer
• China
• KKR
• Baring Private Equity Asia
• Hopu Investment Management
• Boyu Capital
• buyout