KKR, CDH in 2.9x partial exit from China Modern Diary

According to a regulatory filing, Mengniu will buy a 1.29 billion shares in Modern Dairy from KKR-backed Advanced Dairy and CDH-backed Crystal Dairy at HK$2.45 apiece. KKR's stake in the company will fall from 24% to 3.5%, while CDH will be reduced from 8% to 1.5%.

Mengniu, which already owns 1% of Modern Dairy, has a long-standing 100% milk offtake agreement with the company, using it as a source of premium milk. Reports of a potential acquisitiona date back to August of last year. 

KKR teamed up with CDH to acquire a 45% stake in Modern Dairy in 2008 for RMB1.24 billion ($202 million). The global PE giant paid $150.4 million in cash for a 34.5% holding.

Modern Dairy went public in Hong Kong in 2010, raising HK$3.5 billion. KKR reduced its stake to 24% through the offering, generating $78.8 million, while CDH is thought to have exited 1.5% of its holding. The partial exit to Mengniu takes KKR's total proceeds from the investment to $310.6 million.

The private equity firms invested 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. KKR wanted to address this problem.

"A lot of people rushed in and invested in the milk processing companies because the stocks were down 30%," Joe Bae, partner and head of Asia at KKR, told AVCJ last year. "We stepped back and said the issue is there are no large-scale dairy farmers supplying milk in a safe way, there is an opportunity to create value for the industry by developing some. We brought in a lot of experts from the US and Australia to help set up this operation and ran it as a joint venture with Mengniu."

KKR's Capstone unit spent 16 months working with Modern Dairy's management to increase operational efficiencies and make improvements across feed purchasing, breeding, disease reduction and risk prevention. Costs fell by 3%, contributing to an estimated 4% increase in EBITDA in 2010, according to the Emerging Markets Private Equity Association.

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• Topics
• Greater China
• Exits
• Consumer
• China
• KKR
• CDH Investments Management
• GIC Private