Carlyle takes a stake in China's livestock feed industry

The Carlyle Group pays $175 million for an 11.3% holding in CPP, the Chinese subsidiary of CP Group, Thailand's biggest conglomerate, with a purchase of convertible preference shares.

The Carlyle Group has made another move into the Chinese food industry with an agreement to buy a minority interest in CP Pokphand (CPP), one of China's largest livestock and aqua feed producers. The US-based investment behemoth will pay $175 million for convertible preference shares representing an 11.3% stake from the Charoen Pokphand Group (CP Group), Thailand's leading agro-industrial and food conglomerate, and the single biggest shareholder of CPP.

The acquisition, announced on Friday, follows Carlyle's purchase of a 13.62% stake in Singapore-listed China Fishery Group for $190 million in June, and a 17.3% stake in Guangdong Yashili Grou, one of China's biggest infant-formula companies in September 2009.

"We believe that China's feed industry, driven by the change in demographics and government policies, is at a point where the industry will be more stable, and in turn, will favour the responsible, experienced and leading producers such as CPP," said Patrick Siewert, senior director of Carlyle in a joint-statement with CP Group. Carlyle is a global alternative asset manager with $90.5 billion of assets under management committed to 67 funds as of March 31, 2010.

China's animal protein consumption is still below most developed countries, but it is expected that, as meat consumption in China grows along with disposal income levels, the demand for animal and aqua feed products will rise. The Chinese government is also trying to improve food safety standards through tougher licensing standards and monitoring systems, starting at the feed level.

Burnside Asia Holdings Limited, an affiliate of $2.55 billion pan-Asian investment fund Carlyle Asia Partners, will buy around 2.271 billion convertible preference shares and is entitled to more shares in certain circumstances. In addition, CP Group has granted options to Carlyle to buy 324 million convertible preference shares of CPP at HK$0.6 a share.

Following the acquisition, Carlyle will own about 11.3% of CPP on a fully diluted basis, assuming Carlyle doesn't receive further shares or exercise its options.

A further 385.244 million convertible preference shares will be placed with other investors, so the total divestment will represent 13.23% of CPP's ordinary shares. The deal is expected to close by July 22, subject to certain conditions, after which a member of Carlyle will join CPP's board of directors.

CP Group, which was advised by UBS, plans to use part of the proceeds from the transaction to prepay approximately $150 million out of a total of $288 million outstanding to CPP.  It will retain a 70% holding in CPP on a fully diluted basis.

"China's feed industry is going through a dynamic period of growth driven by people's demand for higher quality food and more stringent safety standards. Carlyle's unique experience in the management of food industry value chain will also support CPP to produce superior products and to become the leading supplier to China's livestock farming industry," said Dhanin Chearavanont, chairman of CP Group and CPP in a statement.

CP Group is one of the largest business conglomerates in Thailand with businesses and affiliates operating within the agribusiness, retail and telecommunications sectors. It is the world's largest independent feed producer, and its sales at the end of 2009 were approximately $25 billion.

Hong Kong-listed CPP is the investment arm of CP Group in China, where it is known as Chia Tai, and has established a significant presence in 26 provinces and municipalities in China since arriving in the 1970s, and has more than 26,000 exclusive distributors across the country.

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