Global investment firm KKR (NYSE: KKR ) is teaming up with its old partners CDH Investments and Chinese milk producer Modern Dairy to form a joint venture to build two 10,000-cow dairy farms to deliver a supply of premium raw milk to Chinese consumers, it announced recently.
KKR will invest $140 million in the JV that will build the farms over a two-year period in the Shanghe County of Eastern China's Shandong province. KKR will be the majority owner of the partnership with a 61.5% stake while CDH will own a 20.5% position. Modern Dairy, which KKR had previously owned, but sold its last remaining holdings in earlier this year to China Mengniu Dairy for $410 million, will have the remaining 18% in the venture.
As milk scandals have ripped the Chinese dairy market for years, KKR's China division head David Liu said, "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."
Modern Dairy's CEO Gao Lina added in the companies' statement that, "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."
KKR points to Euromonitor data showing total dairy consumption in China growing at a 10% clip during the past five years, but premium dairy product consumption is growing even faster and nearly doubling its market share from 10% to 19%.
The new joint-venture farms will buy Modern Dairy's excess cows generated through natural herd growth, and after three years' time the agreement also includes an arrangement for Modern Dairy to buy back the partnership's farms.
While the deal is subject to customary approvals, KKR expects the transaction to close in the fourth quarter.