M&A

Bringing home the bacon

KKR and other private equity investors in new pork powerplay

Pig w

In search of porcine profits

“Man is the only animal which consumes without producing,” Old Major tells his fellow pigs as they plot to overthrow the tyrannical Farmer Jones in George Orwell’s classic novel Animal Farm.

But the allegory could apply to the world’s biggest pork eater, China, which consumes far more of the meat than it produces because its industry is so inefficient. Last year, for example, the country bought thousands of hogs from the US, and imported a further $703.5 million of fresh American pork, according to the US Meat Export Federation. (For perspective: America accounts for only 20% of China’s pork imports, estimates the US Department of Agriculture.)

In recent years, one of Beijing’s policy priorities has been to improve its food sufficiency by industrialising agricultural production. It hopes that the days of the family pig in its sty are numbered, although the challenges of introducing modernised pig farming to a country where 58% of farms still produce just 49 pigs per year are daunting.

In the US, 76% of hoggeries have more than 5,000 pigs.

Since Ning Gaoning became chairman of state-owned behemoth COFCO ten years ago, he has been overhauling the group’s food processing, manufacturing and trading businesses. Last week, a 70% stake in COFCO Meat was sold to a group of private equity investors for $270 million. “The barn’s doors are finally open,” is how newspaper CBN reacted to news that Kohlberg Kravis Roberts (KKR), Baring Private Equity Asia, Hopu Investment Management and Boyu Capital are all coming on board as strategic partners.

It is yet another example of a state firm embracing the mixed ownership concept (something that WiC first discussed in issue 230) – here to enhance COFCO Meat’s corporate governance and help it grow into a much bigger player.

COFCO and Hopu, which was set up by the banker Fang Fenglei, already have a track record of working together. The two teamed up in 2009 to purchase a 20.3% stake in Mengniu Dairy and in April this year they did the same again to purchase a 51% stake in Noble Group’s agribusiness.

KKR is also linked to the duo through its 2009 investment in China Modern Dairy Holdings, in which Mengniu bought a 26.9% stake last year.

Local analysts tell CBN that COFCO will dip into its $10 billion war chest to pinpoint suitable M&A targets to increase pig production six-fold over the next seven years. There is work to do. “COFCO has expanded relatively slowly in recent years. It set a goal of raising 10 million pigs per annum, but it is still several million short of that goal,” says Soozzhu.com analyst Feng Wenhui.

COFCO Meat currently raises 1.5 million pigs a year, but it does so at a much higher cost than in the US, which benefits from lower corn prices (50% of hoggery costs).

Pork farming can be volatile. Prices are shaped by long investment cycles and can struggle with corn feed costs, the weather, disease and government policy.

China’s pig industry is also notorious for its health standards. Farmers routinely chuck diseased animals into rivers to avoid the costs of disposing of them properly (see WiC186). China Daily flagged another example in Sichuan in which two men were paid Rmb2,400 ($385) a month to remove about 16 carcasses a day from a reservoir. Many slaughterhouses operate illegally too. The government has forced 18,571 of them to close since 2008 but further consolidation would help the industry to progress further. The top five players only hold an 8% market share compared to the 70% equivalent in the US.

The Chinese government also hopes to persuade more of its citizens to buy chilled pork from supermarkets rather than freshly slaughtered meat from wet markets. Packaged meat accounts for just 14% of consumption in China (67% in the US) and Beijing wants to increase consumption of chilled meat to 20% by 2015.


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