Lessons From KKR – Mengniu Deal. Don’t Drink the Milk

Thursday, December 4, 2008 18:25
Posted in category Invest in China

With nearly 2 months behind us since the news of China’s milk scandal hit the news, KKR looks like they are ready to put on their hit boots and jump into the middle of a huge deal for Mengniu, China’s largest dairy.

Long skeptical of the dairy industry in China (it was only 5 years ago that the only miLk in BeIjing came in a box, came warm, and came from a now bankrupt Italian firm named Parmelot) , the recent coverage of the buy offered a lot for consumers to be concerned with:

  1. Mengniu Modern Dairy’s headquarters is China’s largest single farm, spread over nearly 3,000 acres at Ma’anshan, in the eastern province of Anhui, and stocked with 8,300 imported Australian cows, according to government statistics.
  2. Mengniu Modern Dairy was founded in September 2005 with an initial investment of 250m renminbi ($23m), and is the flagship of China’s dairy industry.
  3. Sources close to the deal said KKR was planning to radically overhaul and upgrade Mengniu Modern Dairy once the deal completes in the next fortnight.
  4. Experts from the US grains council concluded in 2006 that Mengniu Modern Dairy was “poorly prepared for the massive job of managing so many cows on one site [at Ma’anshan]”. It added “the design of the farm is also lacking in many ways, and we observed a number of serious flaws in their management plan.”

But perhaps the most damning quote of the entire piece comes from a “competitor”:

“Mengniu has been trying to turn these farms around, and if it can’t do it, I don’t think KKR will be able to. These are hugely capital intensive and loss-making units. The facilities are poorly designed and there is no training among the local staff.”

So how screwed up is this industry?

4 years ago while working on a starch project, I spent a significant amount of time learning about the dairy industry (starch stabilizes yogurt), and I spent a lot of time meeting with Australians and Kiwis who were managing operations for their firms, and giving technical advice to the local dairies.

In going through my notes from those interviews, I think that strikes me the most when using 20/20 was just how pesimistic these interviews were going.  Essentially, the firms were importing fresh or powdered milk from Australia/ NZ to make their own products.. and many Chinese firms were doing the same at that time as their own cows could not produce milk at a good enough quality.

When discussing ice cream, one executive pointed out that not a single bar of ice cream used fresh milk.. and sure enough, when I started flipping over the bars and reading the back… milk powder… milk powder… milk powder…

I am still not drinking the milk, or the Kool-aid.

There are good deals, and then there are sucker deals… and with the Chinese Dairy Industry saying that 80% of consumers have stopped trusting the milk, I am starting to think that KKR is going to have a tough time convincing people this was a good deal.

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2 Responses to “Lessons From KKR – Mengniu Deal. Don’t Drink the Milk”

  1. SR says:

    December 5th, 2008 at 12:19 am

    We are only buying imported yoghurt and ice cream. But I wonder how much of this is tainted too…

  2. Rich says:

    December 5th, 2008 at 9:25 am


    Us too…and we are importing our sauces as well.