KKR in talks with Chinese dairy business

Kohlberg Kravis Roberts, the US private equity firm expected to list in New York next year, is understood to be in talks with Chinese dairy producer Mengniu Modern Farm regarding a US$100m investment.

KKR declined to comment, but the talks are believed to be at an advanced stage.

The firm’s investment activities in China are led by managing director David Liu, former managing director and co-head of Morgan Stanley Private Equity Asia and a 13-year veteran of Morgan Stanley’s private equity division from 1993 until 2006, when he joined KKR.

While at Morgan Stanley Private Equity Asia, Liu headed up Chinese investments including Mengniu Dairy [not affiliated with Mengniu Modern Farm], Ping An Insurance, Conch Cement and Shanshui Cement.

Few Western private equity firms have made a significant drive into the Chinese market, largely due to the lack of leverage resulting in more minority-stake and growth-capital deals, along with residual regulatory hurdles that the Chinese government has yet to smooth over.

However, buyout firms including KKR and Carlyle Group have made selective investments in the country. Last September, KKR led a US$450m financing for Tianrui Group Cement, the largest cement producer in Henan province, in which it invested US$115m through portfolio company Titan Cement for a minority stake. The deal was the first KKR has completed in China and was financed from its US$4bn KKR Asia fund, which closed at the same time.

At the beginning of the year, Alliance Boots, which KKR took private in an £11.1bn deal in early 2007, invested £41m in a joint venture with China’s Guangzhou Pharmaceuticals Company, each taking a 50% stake in the new business.

KKR has also been linked to a number of deals in the past few years, not all of which found a buyer, such as stakes in Mingsheng Banking Corp and cable TV operator China Network Systems

China’s dairy sector has been on the ropes since a health scare earlier this year in which tainted milk led to the deaths of four infants, a further 50,000 falling sick and the worldwide recall of products containing Chinese dairy ingredients.