Infant formula producer Yashili International, which sources milk from New Zealand, is being snapped up by China Mengniu Dairy in a deal worth about HK$12.5 billion ($2.0 billion) as part of a plan to expand its milk powder busines
The deal for Carlyle-backed Yashili International Holdings marks the latest step by China's milk industry to consolidate the market after several tainted milk scandals tarnished the fragmented sector.
Yashili, one of China's top three producers of infant formula for the domestic market, is planning to build a $220 million infant milk formula export plant in Pokeno.
Hong Kong-listed Yashili, with a market value of US$1.5b, is 52.19 per cent controlled by a holding company controlled by Chairman Zhang Lidian and 24.39 per cent owned by Washingon DC-based Carylyle, one of the largest private equity firms in the world.
Mengiu is 19 per cent-owned by China's state-backed agricultural and food industry supplier COFCO.
This is the second time since May that a US private equity firm has exited a lucrative investment in a Chinese milk company.
For Mengniu, which also recently announced an investment by French dairy group Danone, the purchase will strengthen its foothold in the milk powder segment, which currently contributes less than 2 per cent of its revenues.
Mengniu, twice hit by accusations it sold tainted milk, agreed last month to buy 26.92 per cent of China Modern Dairy Holdings from private equity firms KKR & Co LP and CDH Investments.
That deal allowed Mengniu, whose liquid milk products rank first in China by sales volume, to ensure control over its milk supplies and win confidence among consumers in a market that is growing at about 20 per cent a year.
KKR nearly tripled its original investment in Mengniu from the sale, a person with direct knowledge of the matter told Reuters at the time.
China's infant formula market is expected to grow to US$25b by 2017, Euromonitor data shows, as more mothers join the workforce.
The fatal milk scandal in 2008 involved substituting a chemical into infant formula to increase profits on the product. The melamine-laced milk killed six babies in China and sickened about 300,000.
Other tainted milk scandals have emerged since, which has hammered demand for domestic producers.
Chinese companies are now espousing foreign safety standards - Bright Dairy and Food Ltd, for example, also sources raw materials from New Zealand.
Trading in shares of Mengniu, based in Inner Mongolia, and Yashili were suspended in Hong Kong last week.
Liquid milk products contributed 89.6 per cent of Mengniu's 36.08 billion yuan revenue in 2012, ice cream products 8.8 per cent and milk powder products 1.6 per cent.
Mengniu teamed up with Danish-Swedish dairy group Arla Foods in June last year to develop dairy products in China, in another bid to regain consumer confidence.
Last month, Mengniu struck a deal with France's Danone, the world's largest yoghurt maker. The deal involves the creation of a joint venture between Danone and state-owned Chinese food enterprise COFCO, Mengniu's biggest shareholder.
Danone will also set up a joint venture with Mengniu for the production and sale of yoghurt in China. Danone will own 20 per cent of the business.