Sullivan & Cromwell is advising China Mengniu Dairy on its proposed acquisition of Carlyle-backed Yashili International Holdings in a deal worth about HK$12.5 billion ($1.6 billion).

Hong Kong partner Kay Ian Ng and Beijing partner Gwen Wong are leading the Sullivan & Cromwell team on the transaction.

The deal with Yashili marks the latest step by China’s milk industry to consolidate the market after several tainted milk scandals tarnished the fragmented sector.

It is also the second time since May that a U.S. private equity firm has exited a lucrative investment in a Chinese milk company.

Mengniu is offering HK$3.50 in cash to Yashili’s shareholders, which includes the Carlyle Group and Yashili’s chairman. The buyer is offering a second option of HK2.82 in cash per share and 0.681 per share in a Mengniu-backed acquisition holding company, according to a statement to the Hong Kong stock exchange.

For Mengniu, which also recently announced an investment by French dairy group Danone, the purchase will strengthen its foothold in the milk powder segment, which currently contributes less than 2 percent of its revenues.

Mengniu agreed last month to buy 26.92 percent of China Modern Dairy Holdings Ltd from private equity firms KKR & Co LP and CDH Investments.

That deal allowed Mengniu, whose liquid milk products rank first in China by sales volume, to ensure control over its milk supplies and win confidence among consumers in a market that is growing at about 20 percent a year.

Based on the offer price, Carlyle’s stake in Yashili is worth $388 million, or nearly two times its original investment in 2009.

Hong Kong-listed Yashili International, with a market value of $1.5 billion, is 52.19 percent owned by a holding company controlled by chairman Zhang Lidian and 24.39 percent owned by Washingon D.C.-based Carylyle, one of the largest private equity firms in the world.

Mengiu is 19 percent owned by China's state-backed agricultural and food industry supplier COFCO.

Kanishk Verghese is North Asia journalist at ALB. Follow us on Twitter: @ALB_Magazine.

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