China Mengniu Dairy To Raise $800 Million

HONG KONG (Reuters) – Two Chinese entities are set to invest around $800 million for 20 percent of China Mengniu Dairy (2319.HK), a source familiar with the matter said, the latest cash infusion for an industry recovering from a tainted milk scandal.

One investor would be Hopu Investment Management, a private equity fund founded by Fang Fenglei, chairman of Goldman Sachs’ (GS.N) China joint venture, a person familiar with the matter said on Monday.

Mengniu was likely to make an official announcement later in the day, he added, speaking on condition his name not be used because he was not authorised to talk to the media.

The other investor would be China National Oils, Foodstuffs and Cereals Corp (COFCO), the country’s largest food importer and exporter, the Wall Street Journal reported.

Hopu and Mengniu representatives were not immediately available for comment.

Mengniu was one of the Chinese dairies found to have sold milk containing melamine during last year’s tainted milk scandal. It and other major dairies like Yili (600887.SS) and Bright Dairy (600597.SS) all saw major sales declines in the scandal’s wake, leaving them needing cash to fund their sprawling operations.

Mengniu shares plunged 67 percent in September last year after the scandal broke. They have come back since then, up about 89 percent this year, but are still 20 percent below their pre-scandal levels.

Shares were suspended on Monday pending an announcement.

LESSONS LEARNED

Fund managers said the outside investment may be less designed to seize on low valuations, and is more of a bet on Mengniu’s long term prospects.

“It is a China consumption play story. As the dairy industry is protected by the government, it is a safe bet when compared with others such as sportswear, and if investors want to bet on a recovery of China’s economy,” said Alex Wong, a director of Ample Finance Group in Hong Kong.

“The risk of investing in dairy firms is seen as reduced after last year’s saga as the industry is now better regulated after over expansion, and the management now realises the importance of managing their production well.”

Mengniu said in June its sales were 20 percent lower than normal for the first five months of 2009, but that the negative impact of the scandal was basically over and its products were 100 percent safe to consume.

At least six babies died from drinking infant formula contaminated with the toxic industrial compound, which can falsely raise the results on tests for protein levels.

The cash infusion for Mengniu would mark the second major investment in a Chinese dairy company by a private equity firm within the last month.

Last month, Kohlberg Kravis Roberts & Co. said it had completed a series of investments in Ma Anshan Modern Farming Co Ltd, a leading dairy farm company headquartered in China’s central Anhui province.

Last week, Hunan Taizinai Group, a top dairy products maker, denied a Chinese media report it was in talks to sell assets to the world’s biggest food group Nestle AG (NESN.VX).

By Michael Flaherty and Donny Kwok
(Editing by Doug Young and Chris Lewis)