A group of existing shareholders has raised HK$855.4 million ($110 million) from the sale of a 5.2% stake in Hong Kong-listed China Modern Dairy, taking advantage of the strong run-up in the share price in the past three months.
The deal was well received with around 60 investors putting in orders for about three times the number of shares available, sources said. However, on the back of the share price gains – the stock is up 80% since mid-July – investors were quite price sensitive and most of the orders came at the bottom of the range.
The demand reflects the positive noise around China’s dairy industry in the past few months amid government plans for an industry consolidation that aims to create a handful of high-profile local brands and to improve the quality of the country’s milk products. The Hong Kong IPO of China Huishan Dairy in September helped put further focus on the sector dynamics.
China Modern Dairy, which is the largest producer of raw milk in China, is viewed as one of the top-quality players but it has also become a potential target for a consolidation after China Mengniu Dairy bought a 26.9% stake in the company in May this year. Mengniu is the country’s largest provider of milk products in terms of sales.
One clear sign of the increased interest in the stock is the sharp pick-up in trading volumes. Having had a daily turnover of just $3 million to $4 million a few months ago, China Modern Dairy is now routinely seeing $18 million to $19 million worth of its shares change hands every day.
In light of this, Citi (which acted as the sole bookrunner) approached the three companies that hold shares in China Modern Dairy on behalf of the company’s founders and asked if they were interested in selling a portion of their holdings to meet the demand and take some money off the table.
The companies, Yinmu Holdings, Xinmu Holdings and Youmu Dairy Holdings, which held a combined 31.9% stake before this deal, agreed. In the end, only Yinmu ended up actually selling shares, but all three companies will be locked up for the next 60 days.
The same vendors sold 100 million shares about one month ago through a privately negotiated transaction, fetching HK$2.80 per share, Hong Kong stock exchange data show. Since then, the share price has risen another 20% so a further sale would have been tempting.
This time the deal was larger, comprising approximately 253.1 million shares. They were offered at a price between HK$3.38 and HK$3.45, which translated into a discount of 4.2% to 6.1% versus Tuesday’s close of HK$3.60.
The price was fixed at the bottom for the maximum 6.1% discount, but the sellers were still able to capture the 20% gain in the share price since their last sale.
The buyers were pre-dominantly Asia-based, but there were also some quality orders out of both Europe and the US, the sources said. The order book was slightly hedge fund-heavy, but overall the deal attracted a good mix of long-only investors and hedge funds, they added.
The three sellers will still own a combined 26.7% after this transaction, which makes them the second largest owner after Mengniu. However, while they own shares on behalf of the former founders they are no longer involved in the day-to-day operations of the company and are considered independent shareholders.
Mengniu holds 28% following its acquisition of a 26.9% stake from KKR and CDH. The two private equity firms invested in China Modern Dairy in 2008 and 2009 respectively, and KKR’s involvement in particular has been viewed as having had a positive influence on the quality of the operations.
China Modern Dairy was KKR's first investment into China's consumer sector. Following the divestment in May, its stake dropped to 3.5%, while CDH’s holdings fell to 1.5%.
In September, a company owned by KKR China Growth Fund and CDH agreed to set up a joint venture with China Modern Dairy to construct and operate two large-scale dairy farms that will breed, raise and sell dairy cattle; produce, process and sell raw milk; produce processed milk under OEM contracts; and sell fertilisers.
KKR and CDH, through Success Dairy, will own 82% of the JV while Modern Dairy will own the remaining 12%. Under the terms of the agreement, the partners will invest $140 million over the next 18 months in the JV.
According to a KKR release at the time, the new joint venture farms will buy China Modern Dairy's excess cows generated through natural herd growth. There is also an arrangement for China Modern Dairy to buy back the JV farms in three years, which will boost its long term growth.
