Mengniu Dairy in talks to acquire Modern Dairy

China Mengniu Dairy is in talks to acquire China Modern Dairy, a leading raw milk supplier, in order to gain better control over its milk supply.

China’s state-owned COFCO and US-based private-equity firm KKR – the largest shareholders of Mengniu Dairy and Modern Dairy respectively – have been involved in the talks, reported Bloomberg citing people familiar with the matter.

COFCO holds a 20% stake in Mengniu Dairy, while KKR owns 24% of Modern Dairy.

The purchase price has not been determined, but China Modern Dairy is valued at HK$9.65bn ($1.24bn).

Modern Dairy supplies a major portion of its unpasteurised milk to Mengniu Dairy, and for the six months ending December 2011 it posted revenues of CNY735.6m ($116m).

In November 2011, Modern Dairy announced its plans to set up 30 farms by 2015, each with 10,000 to 40,000 cows in order to lower costs and improve margins, and in line with this plan, the company established 16 farms by the end of December 2011.

By acquiring Modern Dairy, Mengniu Dairy intends to gain better control over its milk supply, amidst concerns over the safety of dairy products sold in the country.

Mengniu, a leading producer of dairy products in China, was implicated in a food safety incident in December 2011, when regulators found that milk at one of its warehouses contained excessive toxins.

The company, which blamed mouldy feed supplied to cows as the reason for the excessive toxins, announced in June 2012 that it will invest CNY3.5bn ($552.58m) to set up self-operated large-scale farms by 2015, to ensure the quality of its milk and regain consumer confidence.

There is an increasing demand for high-quality milk in China, which has been plagued by a series of scandals after the milk controversy in 2008, in which 22 dairy companies including Mengniu were implicated for using industrial chemical melamine in milk and infant formula.

The consumption of dairy products is soaring at an annual compound rate of 20% in China, compared to the US and Europe, where the demand has declined over the past decade.

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Image: Mengniu Dairy intends to gain better control over its milk supply with the acquisition of Modern Dairy. Photo: Alessandro Paiva.