KKR to invest $100 million in Chinese dairy firm: source

HONG KONG (Reuters) - U.S. private equity firm Kohlberg Kravis Roberts & Co. plans to invest $100 million into China's Mengniu Modern Farm, a source familiar with the matter said on Monday, taking a stake in a fragmented and troubled industry.

Other investors may pour $150 million more into the company alongside KKR, said the source, who did not want to be named because he was not authorized to speak on the record.

Mengniu is a management owned dairy company based in Anhui province.

KKR declined to comment.

The investment would break new ground for New York-based KKR, one of the world's biggest private equity firms and a pioneer of the leveraged buyout industry. For one, it would be the firm's first direct investment into China, having opened offices in Asia around three years ago.

It's also unlikely to be a leveraged buyout, and instead an all-cash investment into an industry that, while tainted by a milk scandal, reaches into the world's largest consumer market. Private equity firms have increasingly pursued all-cash deals as banks have pulled back on corporate lending amid the credit crisis.

KKR is known for participating in some of the biggest leveraged buyouts across the United States, Europe and Asia. So while a relatively small deal in a Chinese dairy farm is unique to KKR, other Western firms have put money into the industry.

Morgan Stanley and Goldman Sachs were among the investors that agreed to pay $73 million in January 2007 in Taizinai Group, a Chinese milk-based drinks manufacturer.

KKR's pursuit of Mengniu comes at a time when the country's dairy sector is recovering from a massive tainted milk scandal. In addition to quality issues, the industry is also known to fragmented, less profitable and less efficient than dairy producers from rival countries.

China's government said in October that China's dairy industry suffers from chaotic production and lax oversight, announcing toughened rules after tainted milk products left thousands ill. The announcement came amid a campaign to calm alarmed domestic and foreign consumers after infant milk powder adulterated with the industrial chemical melamine was found to have killed four children and left many thousands more ill with kidney problems and complications.

An investment by KKR would give Mengniu Modern Farm not only a capital injection, but access to a global network of managers and supply chain experts.

(Reporting by Michael Flaherty; Editing by Erica Billingham)