China Modern Dairy Holdings, which operates 22 farms with about 177,921 cows in the country, has signed two agreements with Success Dairy to design, construct and operate two new dairy farms through a joint venture company (JVCo).

Success Dairy is a joint venture entity held by New Dairy Investment, a subsidiary of KKR China Growth Fund, and Crown Dairy Holdings, a wholly-owned subsidiary of CDH Fund.

Under the agreements, China Modern Dairy Holdings and Success Dairy will make initial capital contributions of $5.4m and $24.6m in cash and will also make further capital contributions of $40m.

China Modern will own 18% of the issued share capital of the JVCo, while Success Dairy will own the remaining 82% in the JVCo.

The JVCo will buy about 6,600 dairy cows from China Modern Dairy Holdings at a price on 30 June 2013, pursuant to the valuation of Jones Lang LaSalle Corporate Appraisal and Advisory.

Moreover, the CEO the JVCo will also be named as a director of the JVCo.

As per the agreements, China Modern will be responsible for milk sales of the JVCo.

China Modern Dairy believes that investment in JVCo will reduce its short term capital expenditure and improve the cash flow.

China Modern Dairy has granted Success Dairy the put option, while Success Dairy has granted China Modern the call option. Both the parties have committed not to sell, assign, and transfer any properties of the JVCo.