KKR & Co LP, the private equity company of Henry Kravis and George Roberts, will invest US$100 million in a Chinese raw milk supplier, betting the US$18-billion market will recover from a contamination scandal, two people familiar with the plan said yesterday.

KKR will buy a minority stake in the Anhui Province-based Modern Farm, controlled by former managers of China Mengniu Dairy Co, the nation's biggest liquid milk producer, the two people said, asking not to be identified because it's a private investment.

KKR is investing as China's milk producers, the world's third-largest, are pushed to meet higher standards by the government after a lack of quality control led to a chemical taint that killed at least six infants.

"Valuations in the industry were lowered quite a bit as a result of the milk-powder tainting," Sophie Fan, an analyst at CSC Securities HK Ltd, told Bloomberg News. "So now is probably a good time for private equity to enter the market, and expectations of this may be relatively high at the moment."

Mengniu Dairy dropped 4.6 percent to HK$8.30 (US$1.07) in Hong Kong trading yesterday, after rising as much as 19 percent. Bright Dairy and Food Co jumped 7.8 percent and Inner Mongolia Yili Industrial Group rose 8.3 percent in Shanghai trading.

Melamine, an industrial chemical used to make plastics and tan leather, was found in infant milk powder and other Chinese dairy products in September. Some suppliers had added the chemical to diluted milk to make the protein content appear higher than it is, the Chinese government had said.

China's Ministry of Industry and Information Technology would lead an industry-wide crackdown in the next six months, forcing dairy businesses without proper quality assurance to close, while giving the better-managed companies discounted financing, the government said on November 19. The government is also raising the requirement for dairy farms, forcing them to meet more stringent hygiene standard, it said then.

KKR's investment may help Modern Farm improve its technology to meet higher quality standards. Mengniu Dairy holds a small stake in Modern Farm.

Rising incomes in China have boosted the value of dairy consumption to US$18 billion last year, Euromonitor International Plc said.

(Shanghai Daily December 3, 2008)