Chinese milk supplier Modern Dairy is to team up with investors KKR and CDH to build two dairy farms in the country.

KKR and CDH, shareholders in Modern Dairy since 2008, and the raw milk firm plan to spend US$140m over the next 18 months on two "large-scale dairy farms" in China.

Modern Dairy predominantly sells raw milk to branded dairy companies for processing into consumer products. The three companies said the new venture will "deliver premium raw milk to Chinese consumers".

Modern Dairy CEO Gao Lina said: "The growing demand for premium dairy products is driving strong demand for high quality milk from large scale farms. Following our successful partnership in Modern Dairy, we have chosen once again to partner with KKR and CDH in a new venture to help meet Chinese demand for safe and high quality milk."

Each farm will house 10,000 cows and both will be located in Shanghe county in China's eastern Shandong province.

David Liu, head of KKR China said: "The management of Modern Dairy saw a need arising from increasing demand for safer and healthier milk. The solution was large-scale dairy farm that incorporated global best practices. Today, food safety remains a top priority and this new investment helps increase the supply of premium raw milk in China."

KKR will hold 61.5% of the new farming venture, with CDH taking 20.5% and Modern Dairy 18%. The terms of the deal mean Modern Dairy could buy back the farms in three years.

KKR and CDH first invested in Modern Dairy five years ago. In May, they sold off the bulk of their shares to Chinese dairy giant Mengniu.

A KKR spokesperson declined to comment on the new venture and also said the other parties would refuse to discuss the new agreement. Officials at Modern and CDH did not return a request for comment.

Show the press release

BEIJING & HONG KONG--(BUSINESS WIRE)--KKR, CDH and Modern Dairy today announced the formation of a new joint venture designed to deliver premium raw milk to Chinese consumers. Under the terms of the agreement, KKR, CDH and Modern Dairy will invest US$140 million over the next 18 months to build two new large-scale dairy farms in China.

KKR and CDH have previously invested in Modern Dairy in 2008. Since then, Modern Dairy has grown its herd from 24,000 dairy cows and three farms to approximately 180,000 dairy cows and 22 farms. In 2010, Modern Dairy completed an IPO on the Hong Kong Stock Exchange.

“The growing demand for premium dairy products is driving strong demand for high quality milk from large scale farms,” said Gao Lina, CEO of Modern Dairy. “Following our successful partnership in Modern Dairy, we have chosen once again to partner with KKR and CDH in a new venture to help meet Chinese demand for safe and high quality milk,” added Madam Gao.

David Liu, Member of KKR and Head of KKR China said: “The management of Modern Dairy saw a need arising from increasing demand for safer and healthier milk. The solution was large-scale dairy farm that incorporated global best practices. Today, food safety remains a top priority and this new investment helps increase the supply of premium raw milk in China."

According to Euromonitor, China’s total dairy consumption grew at 10% CAGR over the past five years, with premium dairy product consumption growing significantly faster than the overall market and increasing its market share from 10% to 19%, due to continued consumer concerns with food safety and increasing health awareness. Despite the strong growth, China’s per capita liquid milk consumption is less than 10kg per year, compared to 32 kg in Japan and 78kg in the United States.

Julian Wolhardt, Member of KKR, said: “We had a successful investment previously with Modern Dairy. With this new joint venture, we are following a successful model to work with an experienced local management team, using our capital, global resources and the operational value-add KKR brings to the partnership to help meet the growing demand.”

The new joint venture plans to build two 10,000 cow farms over a two-year period. The farms will be located in Shanghe county of Eastern China’s Shandong province, which has suitable climate conditions for dairy farming and strong support from the local government. KKR, CDH and Modern Dairy will hold 61.5%, 20.5% and 18.0% stakes respectively.

The new joint venture farms will buy Modern Dairy's excess cows generated through natural herd growth. There is also an arrangement for Modern Dairy to buy back the JV farms in three years, which will boost its long term growth.

The transaction is subject to customary approvals and is expected to close in the fourth quarter. KKR will be making the new investment through its China Growth Fund.

Original source: Modern Dairy, KKR, CDH