China Mengniu Dairy is in talks to acquire China Modern Dairy, a leading raw milk supplier in China, in order to gain better control over its milk supply.
China's state-owned COFCO and US-based private-equity firm KKR - the largest shareholders of Mengniu Dairy and China Modern Dairy respectively, are consulting over the deal, reported Bloomberg citing people familiar with the matter.
COFCO holds 20% stake in Mengniu Dairy, while KKR holds 24% stake in Modern Dairy.
The purchase price has not been determined but China Modern Dairy is valued at HK$9.65bn ($1.24bn).
Modern Dairy supplies a major portion of its unpasteurised milk to Mengniu Dairy, and for the six months ending December 2011, it posted revenues of CNY735.6m ($116m).
In November 2011, Modern Dairy announced its plans to set up 30 farms, each with 10,000 to 40,000 cows by 2015, in order to lower costs and improve margins, and in line with this plan, the company already established about 16 farms by the end of December 2011.
By acquiring Modern Dairy, Mengniu Dairy would gain better control over its milk supply, amidst people's concerns over the safety of the country's dairy products.
The consumption of dairy products is soaring at an annual compound rate of 20% in China, compared to the US and Europe, where the demand has declined over the past decade.