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China’s Mengniu Dairy Co. to Buy Modern Dairy Stake to Control Milk Quality

May 8, 2013

The acquisition will increase focus on quality of supplies amid safety concerns in China’s dairy industry.

May 8 -- China Mengniu Dairy Co., the country’s largest dairy producer, agreed to buy 26.9 percent of China Modern Dairy Holdings Ltd. for HK$3.18 billion ($409 million) to gain greater control of milk supplies amid food safety concerns in the country.

Mengniu Dairy will pay HK$2.45 a share for the Modern Dairy stake, the company said in a filing to Hong Kong’s stock exchange today. That’s 12 percent less than the stock’s closing price yesterday. The two sellers were companies controlled by KKR & Co. and CDH China Fund III LP, according to the statement.

Acquiring the shares in Modern Dairy will help Hohhot, Inner Mongolia-based Mengniu Dairy increase focus on quality of its supplies amid safety concerns in China’s dairy industry. Food-safety scandals in China ranging from toxic melamine in milk powder that killed six babies, to kitchen waste reprocessed into cooking oil and rat meat being sold as mutton has driven consumers to buy products overseas.

"Accelerating and expanding investments in quality farms will allow Mengniu to establish a safer and more stable value chain in the dairy sector," Mengniu Chief Executive Officer Sun Yiping said in a statement.

Modern Dairy plunged 6.5 percent to HK$2.61, the most since December 2011. It is still up 23 percent this year.

The two private equity funds bought the shares "at a much lower price and they’ve been holding onto the shares for a long time," Anson Chan, a Hong Kong-based analyst at KGI Asia Ltd., said by phone. "The sale reflected their urgency to realize the gains."

Discounted Price

Mengniu shares gained 0.2 percent to HK$21.80. The benchmark Hang Seng Index rose 0.9 percent.

"We believe Kohlberg Kravis Roberts wanted an earlier exit from China Modern Dairy rather than having to sit through the full investment term," Charles Yan, head of Greater China Consumer Research at Standard Chartered Plc, said in a note. "We believe KKR is focused more on building a long-term strategic relationship with COFCO."

Modern Dairy is the largest raw milk producer in China, as well as the largest dairy farming company in terms of herd size, Mengniu said in a statement.

Steve Okun, a spokesman for KKR, declined to comment on the pricing. KKR completed purchase of Modern Dairy shares in 2009, according to its statement.

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