China National Oils, Foodstuffs and Cereals Corp. (COFCO), the country's largest food importer and exporter, announced on Monday evening it will team up with Hopu Fund to buy 20 percent of China Mengniu Dairy Co.

The two companies will invest 6.1 billion Hong Kong dollars (about US$800 million) in Mengniu. The deal is so far the biggest one in the country's food industry.

Through a special purpose vehicle (SPV), in which COFCO will own a 70 percent stake and Hopu the remaining 30 percent, both companies will subscribe to the shares at 17.6 HK dollars a piece.

The SPV will become Mengniu's biggest shareholder.

As a long-term strategic investor, COFCO will have a right to nominate three nonexecutive directors on the board of Mengniu. It will not participate in the dairy company's daily operation, change its management, nor its strategic orientation.

Ning Gaoning, President of COFCO, said the company regarded the deal as a good opportunity to enter the dairy industry from "a higher starting point." It would help COFCO give full play to the company's advantages and make these advantages complimentary with Mengniu, which has established a good reputation in the country's dairy industry.

Mengniu said in a statement to the Hong Kong stock exchange that it intends to use the proceeds from the share subscription to expand its existing operation.

The company was one of the Chinese dairies found to have sold milk containing melamine during last year's tainted milk scandal. Its shares plunged 67 percent in September last year after the scandal.

Shares were suspended Monday pending the announcement. They rose up to 21.45 HK dollars per share on Tuesday morning.

COFCO is a key trader of grains in China and has built up substantial resources for distribution of food products within the country. It has partnered with Coca-Cola Co. in China to distribute Coke products and last year bought a 5-percent stake in Virginia-based Smithfield Foods Inc.

The Hopu Fund is a US$2.5-billion private-equity fund raised by Goldman Sachs Group Inc.'s China partner Fang Fenglei and backed by Goldman and Singapore's Temasek Holdings Pte. Ltd.

The cash infusion for Mengniu would mark the second major investment in a Chinese dairy company by a private equity firm within the last month.

Last month, Kohlberg Kravis Roberts & Co said it had completed a series of investments in Ma'anshan Modern Farming Co Ltd, a leading dairy farm company headquartered in eastern Anhui Province.

(Xinhua News Agency July 7, 2009)