By Donny Kwok and Stephen Aldred
HONG KONG, June 18 (Reuters) - China Mengniu Dairy Co Ltd signed a second takeover deal in a month on Tuesday, offering to buy Carlyle-backed Yashili International Holdings Ltd in a deal worth about HK$12.5 billion ($1.6 billion) as part of a plan to expand its milk powder business.
The deal with Yashili, which sources all of its products from New Zealand, marks the latest step by China's milk industry to consolidate the market after several tainted milk scandals tarnished the fragmented sector.
It is also the second time since May that a U.S. private equity firm has exited a lucrative investment in a Chinese milk company.
Mengniu is offering HK$3.50 in cash to Yashili's shareholders, which includes the Carlyle Group and Yashili's chairman. The buyer is offering a second option of HK2.82 in cash per share and 0.681 per share in a Mengniu-backed acquisition holding company, according to a statement to the Hong Kong stock exchange.
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 percent of its revenues.
Mengniu, twice hit by accusations it sold tainted milk, agreed last month to buy 26.92 percent of China Modern Dairy Holdings Ltd 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 percent 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.
Based on the offer price, Carlyle's stake in Yashili is worth $388 million, or nearly two times its original investment in 2009. Yashili shares were halted at HK$3.33 last Thursday, up 63 percent this year.
China's infant formula market is expected to grow to $25 billion 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 percent of Mengniu's 36.08 billion yuan revenue in 2012, ice cream products 8.8 percent and milk powder products 1.6 percent.
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 percent of the business.
Hong Kong-listed Yashili International, with a market value of $1.5 billion, is 52.19 percent controlled by a holding company controlled by Chairman Zhang Lidian and 24.39 percent owned by Washingon D.C.-based Carylyle, one of the largest private equity firms in the world.
Mengiu is 19 percent-owned by China's state-backed agricultural and food industry supplier COFCO.
UBS was the lead financial adviser to Mengniu, according to the stock exchange statement. HSBC and Standard Chartered also advised the company.