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Kohlberg Kravis Roberts & Co. (KKR - Snapshot Report) announced that it has inked a definitive agreement with Chinese meat producer Fujian Sunner Development Co. Ltd. to buy 18% stake in the latter for around $400 million. The deal is subject to customary approvals.

KKR’s Purpose Behind the Deal

The strategic alliance, which marks Kohlberg Kravis’ fourth venture in China’s food industry, is an effort by the company to collaborate with the country’s largest breeder, processor and supplier of chicken products to supply improved quality chicken products to local customers.

Kohlberg Kravis believes that to ensure a supply of good quality safe chicken and other products, companies in the animal protein sector should rely more on the vertically integrated chicken farming rather than outside suppliers.

Further, Kohlberg Kravis looks ahead to gain from the rising consumption of chicken in China and to capitalize on the country’s need for safer and better-quality food supply.

Benefits for Sunner

Sunner, with access to a full production string facilitated by its vertically integrated amenities, has been working fervently to reduce the safety threats engulfing the Chinese food industry. This latest deal will result in an additional capital inflow for Sunner – the supplier to McDonalds and KFC – thereby assisting it in further business expansion to meet the required food safety measures.

The company looks forward to reinforce its market control by fulfilling the booming demand for healthy chicken with the help of Kohlberg Kravis’ comprehensive resources and operational proficiency.

Food Safety Hazards in China

With safety issues piling up in the country’s food industry, the main concern for the Chinese government is improvement in food quality. Famous restaurant chains like McDonald’s Corporation (MCD - Analyst Report) and Yum! Brands, Inc. (YUM - Analyst Report) were caught in a scandal earlier in this month when local media uncovered that workers at Shanghai Husi Food Co. – a unit of U.S.-based OSI Group LLC – were reusing meat that had fallen on the factory floor as well as mixing fresh and expired meat.

Notably, Shanghai Husi Food Co. supplies meat to both KFC and McDonald’s in the Shanghai region. This led to distrust and apprehension among customers, which disrupted sales of both the international food brands.

Other Endeavors by KKR in the Chinese Food Industry

Kohlberg Kravis has been steadily investing in various sectors of China. Looking in the Chinese food industry, the company purchased a stake in a meat-processing unit of China’s Cofco Group for $270 million in Jun 2014. Moreover, the company has investments in Ma Anshan Modern Farming Co. and Asia Dairy Holdings as part of its investments related to food safety in China.

Our Take

While Chinese meat companies are making investments in foreign firms to overcome the safety glitches weighing on their profitability, many foreign buyout companies like Kohlberg Kravis, Olympus Capital and Carlyle Group (CG - Snapshot Report) are continuously investing in China's food chain to gain from the growing demand for meat and the need for improved food standards.

Currently, Kohlberg Kravis carries a Zacks Rank #5 (Strong Sell).

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