China Mengniu to pay $410m for stake in KKR's Modern Dairy

China Mengniu Dairy Co Ltd said on Wednesday it planned to buy 26.92 percent of the country's largest raw milk producer, KKR-backed China Modern Dairy Holdings Ltd, for HK$3.18 billion ($409.78 million) to secure a long-term premium milk supply.

China Mengniu said it would buy an aggregate 1.296 billion shares of Modern Dairy from KKR & Co L.P. backed Advanced Dairy SPA and CDH Investment Advisory Private Limited-backed Crystal Dairy SPA at HK$2.45 per share.

New York-based KKR and China-focused private equity firm CDH bought stakes in Modern Dairy after the country's 2008 milk industry was battered by a scandal involving chemical-laced milk products. KKR paid $150 million in cash for a 34.5 percent stake, which it sold down to 24 percent after Mengniu's IPO.

China's dairy market is still a relatively young industry, with consumption of dairy products growing at an annual compound rate of 20 percent, a stark contrast to US and European markets where demand has been shrinking in the past decade.

Shares of Modern Dairy have risen about 31 percent so far this year to close at HK$2.79 a share on Tuesday.

Speculation about talks between China Mengniu Dairy and China Modern Dairy surfaced in August last year.

Modern Dairy, which supplies most of its milk to Mengniu Dairy, has said it aims to have 30 farms by 2015, each with 10,000 to 40,000 cows.

China's dairy industry has been struggling to restore consumer confidence after a series of scandals, the worst of which was in 2008 when milk laced with the industrial chemical melamine killed at least six children and sickened nearly 300,000. Major dairy product makers including Mengniu were implicated in the melamine scandal.

Last year, China's Bright Dairy & Food Co Ltd recalled batches of sour milk after it received hundreds of customer complaints, while Inner Mongolia Yili Industrial Group Co recalled baby formula tainted with "unusual" levels of mercury.

Prior to Wednesday's deal, Mengniu owned more than 1 percent of Modern Dairy.