In early 2009, when Carlyle Group LP’s China team proposed that the private-equity firm invest in a Chinese infant-formula producer, the initial response was disbelief.
The idea seemed crazy to members of Carlyle’s Washington investment committee, according to one account of the meeting. Memories were still fresh of the food-poisoning scandal in China in which tainted milk killed at least six infants and sickened 300,000 others.
The Carlyle team eventually convinced the committee to buy a 17.3% stake for an undisclosed sum in Guangdong Yashili Group Co. Its winning pitch: growing demand from China’s middle class for safe and reliable food.
Global private-equity firms, including Carlyle, Blackstone Group LP (BX) and 3i Group PLC (III.LN), are increasingly looking to China’s food chain–from dining and food retailing to fishing–as the Chinese government seeks to consolidate the industry and improve food safety. Foreign private-equity groups invested $2.6 billion last year in the country’s food and agriculture sectors, more than triple from a year earlier, according to Zero2IPO Group, a Beijing-based research firm that tracks China’s private-equity industry.
China’s dairy industry was reeling from the disclosure that milk produced by the state-owned Sanlu Group contained melamine, an industrial chemical that made the milk appear to have a higher protein level than it really did. Guangdong Yashili wasn’t involved in poisoning milk, but its supply chain was compromised. The company, along with 20 other milk producers in China, failed a government test in 2008 to screen for tainted milk.
Carlyle executives helped organize tours for Yashili’s managers to find new sources of raw-milk powder in countries such as New Zealand and Australia. Late last year, shortly before Yashili’s initial public offering, Carlyle created a quality and safety advisory committee headed by Robert Brackett, a former U.S. Food and Drug Administration director.
In October, Yashili raised 2.3 billion Hong Kong dollars (US$295 million) in a Hong Kong IPO. A Carlyle spokesman said the firm is ‘satisfied’ with Yashili’s performance and has ‘confidence’ in its future.
The fragmented structure of Chinese farming is partly to blame, analysts say. The sector has long been dominated by small, family-run businesses, making it hard for authorities to spot problems and enforce standards. There are 200 million farming households and 400,000 food-processing companies with fewer than 10 employees scattered around the country, according to Christopher Hickey, the FDA’s China director.
China’s growing middle classes are demanding higher quality products and favoring the convenience of processed and packaged food. Organic foods–nearly nonexistent in China a decade ago–are now in high demand. Sales of packaged organic food are expected to hit 543 million yuan ($85 million) by 2014, from about 170 million yuan in 2009, according to Euromonitor International, a market-research firm in London.
In another recent deal, a consortium led by Blackstone invested $600 million in Dili Group Holdings Co., one of China’s largest operators of wholesale vegetable markets. Blackstone, which put in $194 million for a 10% stake in Dili, sold it back to the company in the first quarter of this year, which gave the private-equity firm a 16.5% return on its investment, according to people familiar with the matter. The sale came amid Beijing’s effort to control food prices to tamp down inflation, which has limited the profit potential of food producers and traders.
via China’s Food Chain Lures Private Equity-华尔街日报.