KKR, China Modern Dairy to Form China Milk Farm Ventures

China Modern Dairy Holdings Ltd., the nation’s largest raw-milk producer, and a company part-owned by KKR & Co. agreed to build two dairy farms together amid government moves to strengthen food safety.

Modern Dairy and Success Dairy, owned by a subsidiary of KKR China Growth Fund L.P. and a fund of CDH China Management Co., will respectively hold 18 percent and 82 percent of the joint venture operating the farms, Modern Dairy said in a filing today. The partners will invest a combined $140 million in the next 18 months, they said in a separate statement.

The partnership will provide premium raw milk to consumers in China as the government steps up scrutiny of food such as infant formula after contaminated goods were found as recently as last month. Formula makers need to own their milk sources and have research and development capability, according to a draft of new rules for the baby-milk industry published in August.

The joint-venture farms will initially buy 6,600 cows from Modern Dairy, increasing to a total of 10,000 over two years, the Maanshan, Anhui-based company said in an e-mail.

Modern Dairy, which will be responsible for the partnership’s milk sales, may also buy back the farms in three years under terms of the agreement.

Modern Dairy rose 0.3 percent to HK$2.99 as of 2:47 p.m. in Hong Kong trading, headed for the highest closing price since its initial share sale in November 2010. The stock has advanced 40 percent this year, compared with a 2.2 percent gain for the city’s Hang Seng Index.

Tainted Milk

Fonterra Cooperative Group Ltd. recalled dairy products in countries including China after saying Aug. 3 that whey protein used in goods such as baby formula may have been tainted with botulism-causing bacteria.

In December 2011, China’s General Administration of Quality Supervision, Inspection and Quarantine said it found above-standard amounts of a toxin in some milk products including a batch from China Mengniu Dairy Co. during a random inspection. The company subsequently said it had destroyed the contaminated products and will boost its quality control.

Mengniu agreed to buy 26.9 percent of Modern Dairy for HK$3.18 billion ($410 million) in May this year to gain greater control of milk supplies. A month later, Hohhot, Inner Mongolia-based Mengniu offered HK$12.5 billion to buy Yashili International Holdings Ltd., a Chinese maker of infant formula.