UPDATE 2-KKR-led consortium invests in Chinese pork industry

Fri Jun 6, 2014 1:58am EDT

(Recasts, adds analyst comment)

By Stephen Aldred

HONG KONG, June 6 (Reuters) - A private equity consortium led by KKR & Co LP has agreed to pay about $270 million for up to 70 percent of China's COFCO Meat, a source said, targetting consumers willing to pay a premium for high quality, safe pork products.

The deal underscores the trend towards food safety in China, and follows Shuanghui International's acquisition last year of U.S. firm Smithfield Foods Inc, the world's largest pork processor, to secure a supply of high quality meat.

The KKR led consortium will aim to grow COFCO Meat's share of China's massive pork market, the source with direct knowledge of the deal said, controlling the production process and promoting its Joyful and Maverick brands as premium products.

The firms announced the deal on Friday without giving financial details. The source could not be named as details of the deal were private.

KKR will invest around $150 million from its second Asia fund in COFCO Meat, a subsidiary of China's state-owned COFCO Group, while Baring Private Equity Asia, Hopu Investments and Boyu Capital will make up the balance, the source said.

Hopu is led by politically connected businessman and ex-Goldman Sachs banker Fang Fenglei, while Boyu was co-founded by Alvin Jiang, the grandson of former China premier Jiang Zemin.

"It is a good thing. It is a kind of trial of mixed ownership, with industry funds participating in the management," said Mao Changqing, chief strategist at CITIC Securities, noting the COFCO Meat had peformed poorly in recent years.

China is the world's top pork producer and consumer, accounting for about 50 pct of global consumption, COFCO Meat said. China's pork consumption is expected to rise to nearly 57 million tonnes by 2020 from 46 mln tonnes in 2012, according to a World Bank report released on Friday.

The high density of pig farms, and poor management associated with small-scale farming has led to food scares in recent years, including the discovery of 16,000 dead pigs in a river in Shanghai.

In response, China has been enforcing stricter standards for hog production, leading to an increase in larger farms.

The KKR-led investment will help COFCO Meat, currently only a small player in the pork industry, build and manage large-scale hog farms and meat processing plants.

The company, established in 2009, currently produces about 900,000 hogs a year, out of the 700 million hogs consumed each year in China, the source said.

It aims to ramp up production by 5 to 6 times in the next 5 to 7 years, focusing on China's eastern seaboard and northern regions, close to dense urban areas where consumers are expected to pay a premium for quality meat, the source added.

Both KKR and Baring had experience in livestock cycles and managing biological assets, said a Hong Kong-based livestock analyst, who declined to be named.

KKR also has previous experience investing in China's food supply chain, through its investment in milk producer China Modern Dairy Holdings Ltd.

The investors expect to list COFCO Meat in around five to seven years, the source said. (Additional reporting by Niu Shuping in BEIJING and Naveen Thukral in SINGAPORE; Editing by Richard Pullin)

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