China Mengniu Dairy Co Ltd yesterday said that it will acquire 26.92-per cent stake in China Modern Dairy Holdings Ltd, for HK$3.18 billion ($409 million), in order to secure long-term premium milk supply.

Mengniu Dairy, which already holds 1.078 per cent in Modern Dairy, would buy around 1.296 billion shares from US private equity firm KKR & Co backed Advanced Dairy SPA and CDH Investment Advisory Pvt Ltd backed Crystal Dairy SPA at HK$2.45 per share.

Post purchase Mengniu Dairy will hold approximately 27.99 per cent stake and become the single largest shareholder in Inner Mongolia-based Modern Dairy.

Mengniu Dairy said enhancing supply of quality milk sources has been its key focus in recent years and in order to secure a long-term and stable source of premium milk supply, it has constructed modern ranch facilities, invested in large-scale ranches and provided loans and raw milk prepayment.

Modern Dairy has been its long-term milk supplier and said that the investment ''will strengthen the cooperation between the Group and Modern Dairy and provide the Group with a stable source of premium milk supply.''

Mengniu Dairy is one of the leading dairy product manufacturers in China, with MENGNIU as its core brand. The company's products range includes liquid milk products, such as UHT milk, milk beverages and yogurt, ice cream and other dairy products such as milk powder.

Mengniu's liquid milk products ranked first, in terms of sales volume and sales value, among similar products in China in 2012, according to China Industrial Information Issuing Centre.

Modern Dairy is the largest dairy farming company in terms of herd size as well as the largest raw milk producer in China.

Its primary business is raising dairy cows and selling raw milk to branded dairy companies for processing into consumer dairy products. Modern Dairy was founded in 2005 and built its first farm in 2006.

Modern Dairy operates 22 dairy farms in Anhui, Heilongjiang, Hebei, Shandong, Shaanxi, Sichuan, Inner Mongolia, and Hubei provinces and has total production capacity of over 700,000 tons of raw milk per year.