Deal focus: Cream of the crop

AustAsia’s success is built on a series of 1% gains, according to Tai Lin, a managing director at Proterra, which has been an investor in the Chinese dairy business since 2010. The location and design of the cattle barns, the genetic make-up of the cows, even the route they take each day to the milking parlor all contribute to operational performance.

“If you are 5-10% better than your competitors, that’s the difference between making very good profit today and losing money. If you look at the average milk yield per cow, it’s really good – around 36 liters in the summer and 40 liters during the winter. Some other companies might get similar yields at individual farms, but the next best competitor is probably at 30 liters at most across the whole herd,” says Lin.

As a result, AustAsia is profitable at a time when depressed milk prices in China mean a lot of other dairy players are not. Proterra recently cashed in on this dynamic, agreeing to sell its 38% stake in the company to Japfa – the Singapore-listed agribusiness player that is its partner in the venture – for $263.1 million. The GP has a put option that becomes enforceable in 2018, so Japfa negotiated a deal to preempt it. Proterra will receive $223 million in cash and $40 million in Japfa stock, which means it will more than double its money on a $100 million-plus investment (including upside on the share price).

That capital was committed in installments alongside contributions from Japfa as AustAsia scaled up. They backed an experienced management team that wanted to buy an existing but rundown dairy farm, gut it, and built a new facility from scratch. As of September 2017, the company had more than 80,000 cows, including 41,766 milking cows, across five farms in Shandong province and two in Inner Mongolia. There is also an Indonesian business with 4,508 cows.

In 2016, AustAsia sold 373 million kilograms of raw milk in China and 24 million liters of extended shelf life branded milk in Southeast Asia. It has distribution operations in both markets, working under the Greenfields brand. A processing plant opened in Indonesia last year and a similar facility is currently under construction in China. Japfa said the company would focus on developing its downstream capabilities, so more brand-building is likely.

Proterra, which spun out from Cargill three years ago, made the investment before private equity capital flooded into Chinese dairy farming assets in 2013-2015 – much of it predicated on higher milk prices. Many of those deals have yet to flourish, and although the 2014 price point of RMB4.20 per kg remains a distant memory, Lin notes that the cycle is slowly turning.

“A lot of dairy farmers are losing money and that’s not sustainable. Total milk production not really growing, and unless you believe that consumption of dairy in China isn’t going to grow, the situation must change,” he says. “We would certainly invest in dairy again; in fact, now is a good time to get in.”   

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• Topics
• Greater China
• Trade sale
• Consumer
• Industrials
• China
• Proterra Investment Partners
• Agriculture
• Exit