Carlyle finds the right formula for Yashili

Last week, The Carlyle Group joined the growing list of firms to cash in on this strategy as it agreed to exit infant formula manufacturer Yashili to China Mengniu Dairy. Mengniu is buying about 75% of the company from majority shareholders the Zhang family and CA Dairy, a vehicle owned by Carlyle Asian Partners II and its parallel co-investment entity. The private equity firm will receive HK$3 billion ($387 million) for its 24% holding.

Carlyle initially paid $95.2 million for a 17.3% stake in Yashili back in September 2009. This was less than a year after China's dairy industry reached its most recent nadir. Milk had become tainted with melamine as it passed through the fragmented supply chain, resulting in the deaths of six infants. Yashili wasn't among the main culprits but it suffered with the industry as a whole, posting a record loss of $128 million in 2008, mainly due to product recalls and decreased sales.

Carlyle's priority was not only to ensure product safety but also to restore consumer confidence. "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 (FQSAC) and supply chain initiatives in New Zealand," says Eric Zhang, managing director at Carlyle.

FQSAC was the first committee of its kind in China, headed by Robert Brackett, former director of the US Food and Drug administration's Center for Food Safety and Applied Nutrition. On the back of the committee's efforts, among other things, Yashili's fortunes revived and it went public in Hong Kong in 2010, raising $348 million. Carlyle increased its stake to 24.4%.

Following the IPO, Yashili stepped up efforts to strengthen its brand, emphasizing in marketing campaigns that the raw materials for its formula were sourced from New Zealand. In early 2012 the company introduced slogans like "Pure New Zealand, Cherish Yashili." It also committed RMB1.1 billion ($180 million) to a new milk processing plant in Pokeno, near Auckland. The plan received regulatory approval in April.

For Mengniu, the investment means a larger share of the domestic baby-formula market, which is projected to grow by more than 70% to $21.8 billion by 2015. It is the company's second lateral deal in a matter of weeks, following the purchase of a minority stake in China Modern Dairy, facilitating the partial exit of KKR and CDH Investments.

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• Topics
• Exits
• Consumer
• Greater China
• Consumer
• China
• Exit
• Trade sale
• The Carlyle Group