Goldman to Milk Chinas Dairies

Hopu Said to Plan Investment in China Mengniu Dairy (Update3)

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By Cathy Chan

July 6 (Bloomberg) -- Hopu Investment Management Co., a fund backed by Temasek Holdings Pte, plans to team up with a Chinese state-owned company for an $800 million investment in China Mengniu Dairy Co., a person familiar with the matter said.

Hopu, a $2.5 billion fund run by Goldman Sachs Group Inc.’s China partner Fang Fenglei, and its partner may form a consortium to buy about 20 percent of the milk producer, the person said, declining to be identified. Together, the two companies would become the biggest shareholder in Mengniu after purchasing new and existing shares, the person said.

Mengniu, China’s biggest maker of liquid milk, was one of the 22 dairy producers found to have sold products containing melamine in a scandal that saw six children killed and 300,000 sickened in the country last year. The government on July 3 said it will encourage mergers in the dairy industry as part of a push to improve product quality.

“They will probably use the money to merge with some local players to increase market share,” said Renee Tai, senior vice president for research at CIMB-GK Securities. “It can definitely ease the financial strain since the milk scandal.”

Mengniu was halted from trading in Hong Kong today, pending an announcement on a possible share sale and the purchase of existing stock, according to a company filing. The shares have climbed 89 percent this year after falling 65 percent in 2008.

Annual Loss

Guy Cui, a Hopu managing director, didn’t answer a call to his cell phone seeking comment. Chris Kwok, a Hong Kong-based spokesman for Mengniu, declined to comment in a phone interview.

Mengniu will use the proceeds from the investment to bolster production, improve corporate governance following the melamine scandal, and to fund potential acquisitions, the person said. In April, Mengniu reported its first full-year loss since going public in 2004 as the melamine scandal led to recalls. The company had 3 billion yuan ($439 million) in cash on Dec. 31.

“They really need the money,” CIMB-GK’s Tai said in a phone interview today. “Quite a bit has to be done in the quality control side and with a better balance sheet, they should be better able to improve on the production side.”

China, the world’s third-largest milk producer, is pushing dairy farms to meet higher standards after Melamine, an industrial chemical used to make plastics and tan leather, was found in infant milk powder and other dairy products last year.

Some suppliers had added the chemical to diluted milk to make the protein content appear higher than it is, the Chinese government said.

Hopu Deals

Hopu, founded by Fang in Beijing in 2007 and run by former Goldman Sachs banker Richard Ong, was among investors who bought shares in China Construction Bank Corp. from Bank of America Corp. in May, people familiar with the matter said at the time. Bank of America raised $7.3 billion in the sale.

Mengniu would be the fourth investment for Hopu, which raised $2.5 billion from investors including Goldman Sachs and Temasek last year. Hopu also bought part of Royal Bank of Scotland Group Plc’s stake in Bank of China Ltd. in January.

KKR & Co., the private equity company of Henry Kravis and George Roberts, invested $150 million in Chinese milk supplier Ma Anshan Modern Farming Co., two people familiar with the matter said last month. Modern Farming wasn’t linked to the melamine scandal.

To contact the reporters on this story: Cathy Chan in Hong Kong at kchan14@bloomberg.net

Last Updated: July 6, 2009 01:47 EDT


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