Synlait shares fall to record low after A2 Milk moves to end exclusive agreement
Tuesday, 19 September 2023
Niche milk marketer The a2 Milk Company is moving to take more control of its supply chain by cancelling its exclusive manufacturing and supply agreement with Synlait Milk for its key infant formula product.
A2 Milk’s announcement of the cancellation, which cites performance issues, comes as Synlait is already under pressure, warning it may report a loss and flagging plans to sell its Dairyworks and Talbot Forest Cheese businesses to reduce debt.
A2 Milk is Synlait’s largest customer, and Synlait disputes A2 Milk’s right to cancel the exclusivity arrangements. Synlait’s shares fell 9.4% to a record low $1.16 on Monday.
“That’s not terrific for them,” said Craig Stent, head of equities at Harbour Asset Management. “It has been a tough time for Synlait.”
A2 Milk and Synlait have had a symbiotic relationship but have both sought to diversify their businesses over recent years.
Synlait invested in a liquid plant at its main Dunsandel factory, bought cheese companies Talbot Forest Cheese and Dairyworks, and built a new factory at Pokeno where it has secured a plant-based customer.
A2 Milk has turned its focus to stainless steel, buying a controlling stake in Southland’s Mataura Valley Milk factory in 2021 and flagging plans to acquire additional manufacturing capacity in New Zealand and China as it seeks to have greater ownership of its own supply chain.
The Mataura Valley factory is unprofitable, reporting a loss of $26.5 million before interest, tax, depreciation and amortisation in the latest year, but A2 Milk is targeting a path to profitability by the 2026 financial year or earlier.
On a conference call following its annual result last month, A2 Milk managing director David Bortolussi said the company may invest more than $100m in blending, canning and laboratory facilities at Mataura Valley Milk over the next several years to create a fully integrated facility that could be registered with Chinese regulators to supply infant formula.
China is the world’s largest infant formula market and makes up the bulk of A2 Milk’s sales.
Synlait is currently the exclusive manufacturer for A2 Milk’s infant formula for the Chinese market, and holds the Chinese SAMR regulatory licence for the product, which is held by the manufacturer.
Stent said ending the exclusive agreement with Synlait would allow A2 Milk to develop other products for the Chinese market that could be manufactured at Mataura Valley Milk, or in China.
A2 Milk is sitting on a pile of cash that it has earmarked for potential investment – it held net cash of $757m at the end of the financial year.
Bortolussi said the company is keeping its balance sheet strength as it looks for ways to accelerate its access to China label registrations, primarily in New Zealand but potentially including mergers and acquisitions, joint ventures or alliances.
Some have speculated that A2 Milk might be eyeing up the acquisition of Synlait, which has a market capitalisation of $254m.
A2 Milk already holds a 19.8% shareholding in Synlait, but any takeover would have to be agreed with Synlait’s controlling shareholder, Chinese dairy company Bright Dairy which has a 39% holding.
Meanwhile, A2 Milk has an exclusive import and distribution arrangement with China State Farm Agribusiness which is a subsidiary of China National Agriculture Development Group Co, the parent company of China Animal Husbandry Group, which holds the remaining 25% stake in Mataura Valley Milk.
For now, A2 Milk has agreed to maintain Synlait’s exclusivity until any dispute was resolved, on the assumption it was resolved by the end of 2024.