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KKR backs Cofco drive to ramp up China hog output

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Cofco, the Chinese food giant, unveiled a third agriculture tie-up in four months with Western partners as it sought to exploit the industrialisation of the world's biggest pork producing country.

Cofco revealed that its pork subsidiary, Cofco Meat, had sold stakes to private equity groups including KKR, the US-based champion of leveraged buyouts, in a "strategic partnership" to construct and manage "large scale" hog farms and meat processing plants in China.

Locally-based Barings Private Equity Asia, Boyu Capital and Hopu, the private equity group founded by Fang Fenglei, a former senior executive for Goldman Sachs in China, have also backed the purchase, which is reported to involve the purchase of a stake of up to 70% in Cofco Meat for $270m.

Of this, KKR is believed to be investing about $150m.

Cofco meets KKR

The tie-up joins state-run Cofco to one of the icons of Western capitalism, in KKR, whose 1989 leveraged buyout of RJR Nabisco was chronicled in the book Barbarians at the Gate.

However, Cofco has shown an increasing willingness to join with foreign partners to help secure food for China, which has 21% of the world's population, but just 9% of its agricultural land.

In March, the group, which for instance controls 90% of China's wheat imports, bought 51% Nidera, the Dutch grain trader, followed up in April by the $1.5bn purchase of a stake in an agriculture tie-up with Singapore-based commodities giant Noble Group.

But while these deals are viewed as helping Cofco originate agricultural commodities, from grains to sugar, for import to China, Friday's tie-up involves tapping foreign money for investment in farm production in the country itself.

That is along the lines of investments already made in China by KKR, which in 2008 paid $150m for a 34% stake in China Modern Dairy, the country's top raw milk producer, tripling its money on a sale of most of its stake a year ago.

KKR and China Modern Dairy in September unveiled a $140m tie-up to build two large-scale dairy farms in China.

Changing industry

The hog tie-up is aimed at exploiting the industrialisation of pork production in China, which is responsible for more than half world output, and consumption, of the meat.

Industrialised hog farms with production of more than 50,000 head a year, account for "less than 1%" of the country's pork supply, Cofco said.

However, "large-scale farms are expected to increase more than six-fold by 2020," encouraged by, besides greater operational efficiency, a drive by China to improve output of traceable and high quality of food, following a long history of scares.

'Much bigger actor'

Ning Gaoning, the Cofco chairman, said that expanding in meat was a "natural extension" of the group's footprint, while partnership with the private equity groups would "diversify our equity ownership and enhance our corporate governance".

The joint venture partners would "together grow Cofco Meat into a much bigger actor in China's meat industry".

For KKR, Julian Wolhardt, regional leader for China, said that "we look forward to fully utilizing our global resources and local expertise to assist Cofco Meat in setting the bar for food safety in China".

By Agrimoney.com

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