There’s light at the end of tunnel for Synlait, says chair George Adams, and ‘it isn’t a train’

Saturday, 24 August 2024

If the Synlait board succeeds in saving Synlait, the softly-spoken, seemingly unflappable Northern Irishman who chairs it says it will be a “badge of pride”.

George Adams was drafted in in March to help the dairy company climb out from under a mountain of debt that was crushing it, and had its bankers demanding it recapitalise, or face insolvency.

It was a huge task, and it will come to a head on September 18, when shareholders will vote whether to approve Synlait’s two largest shareholders- Bright Dairy and A2 Milk- putting $218 million into the company to pay down its debts.

If they vote against the plan, Synlait faces a high chance of, at best voluntary administration, and at worst receivership and liquidation.

When he was shoulder-tapped for the job, Adams said there were two questions he needed to answer before deciding whether to take it.

“The first thing is; are you intrigued by this? And the second one is; Are the people who work there dicks?” he says.

The answer to the first question was “yes”, and the answer to the second was “no”.

“I knew some of the people, and they weren’t. They were actually good people,” Adams says.

“I thought really long and hard about it. It meant doing a lot of due diligence to understand the scale of the problem, and whether I could fix it without putting my assets against the creditors, which is what you have to do as a director.

Ultimately, he decided: “I felt it would be a very difficult job, but doable”, and the vote in September will determine whether doable becomes done.

So, you have some light at the end of the tunnel?

“Yes, and it’s not a train. It’s taken a lot of work to get to this stage.

“As the days have gone on, our team has got more excited about the opportunity to literally put the business back on its feet, and to start rebuilding the profitability, actually running the business again, rather than dealing with deleveraging and balance sheet issues.”

How did Synlait get here? Was it opening the factory in Pōkeno near Auckland?

“If you go back to 2017 and 2018, A2 was growing like a weed. Everybody was looking post Christchurch Earthquake at supply chain resilience, having two locations, and the forecast was fantastic,” Adams says.

Synlait borrowed heavily to invest to expand production to profit from the rise and rise of A2, and then disaster struck.

“Wind it forward two years, and it [the Pōkeno facility] was empty, because we had this global cataclysm,” Adams says.

The cataclysm was Covid.

“Covid stopped the Chinese having babies,” Adams says.

On average 17m babies were born in China each year, but during the Covid pandemic, couples held off having them.

There was a “huge” drop in the birthrate, and hence the demand for infant formula, Adams says.

“That was because the Chinese government suggested people not have babies during No-one saw that coming,” he says.

So, just bad luck then?

“On one way of seeing things, that was genuinely, desperately unlucky. But then, I think, they compounded the problem by doubling down. They spent another $90m to $100m on the facility to convert it [to produce plant-based milks] and the volumes against that just did not go through,” Adams says.

“Bad luck, bad timing. If I was seeing what A2 was doing back in the day, would I have made a different decision? That’s the bit I am truly not sure about,” Adams says.

However, Adams says: “I think they could have been forgiven for one issue, genuinely, but doubling down and spending a couple of hundred million bucks when things started to turn down, I don’t think that was good decision-making.

“They spent a tonne of money to buy Dairyworks, the cheese company, which they probably didn’t need to,” Adams said.

How has it been heading efforts to save Synlait?

“You have got to be kind of up for it, right? You have to be up for it?” Adams says.

“Look, I have found it quite exhilarating. Tiring, but exhilarating.

“Let’s be honest, if we deliver an outcome for the business that’s robust, and the outcome we wanted, and we are back to our profitable selves in the next 12 to 24 months, I’ll take that,” Adams says.

“That will be a badge of pride for the organisation and the board who have worked through this. I genuinely think we will have done something good,” he says.

Is he optimistic the September vote will go his way?

He says he is, but it appears largely because he thinks the alternative is too awful.

A “no” vote in September would be “highly likely” to lead to Synlait’s insolvency.

The options are set out in a report from investment consultancy Northington Partners, commissioned by the Synlait board, which concluded the return for shareholders in an insolvency would be likely to be lower than if the company was recapitalised as a going concern.

“I think Northington have said in the insolvency, maybe 15 cents to 50c is the range a share, but I think what they have said, and I quote, ‘highly uncertain, and a high risk outcome for shareholders’,” Adams says.

The range for the share price for a going concern was 46c to 83c, Northington estimated.

“Nobody really makes any money out of insolvency, except maybe [insolvency] practitioners,” says Adams.

“4 cents to 80 cents is the range for a going concern,” he says.

“For some people that may be what they want. Some people have a much higher tolerance for risk than others, but I can’t imagine, frankly, that if I am a rational shareholder, that I would vote for what is essentially a vote for insolvency.

There’s a possibility of going into voluntary administration, where you don’t have any control. It’s more of a staged process where they try to remedy the issues for the banks, and hand the company back to the board again.

But I couldn’t see why banks wouldn’t just put it into receivership.

Why weren’t retail shareholders given the chance to chip in capital, instead of Bright and A2 Milk providing it all?

“To put it in context, if you take the undisturbed share price from last week, which was the date we basically announced the plan. That was the 30 cent share price. We had to raise $3.4 dollars for every dollar of market cap. That’s not an easy gig, I can tell you,” Adams said.

“If you are a retail shareholder with ten grand of shares, we would have had to ask them to put their hand in their pocket for $33,000. There are not many retail shareholders who would do that,” he said.

There were cost and technical reasons that also made it easier to leave the retail shareholders out, but he says: “This ultimately provides the best value, highest value, outcome for minority shareholders, despite the dilution.

“It’s not a perfect outcome. I swear to God there was no perfect outcomes for us. This I think, is the fairest outcome.”

Does New Zealand need Synlait to survive?

Reducing competition is never healthy, says Adams.

“I think it’s important that Synlait survives. A) we’ve got a very good product, and B) we’ve got a very loyal farmer base who enjoy working with us, and our Lead with Pride programme, which I think is really helpful for all of New Zealand, frankly,” he says.

“We are very much someone who keeps the rest of the industry honest.”

Loyal farmers? You have had a lot of letters signalling farmers intentions to stop supplying milk to Synlait. Can you persuade them to stay?

“Even though the letters have come in, I genuinely wouldn’t change that descriptor, and the reason for that is they have been very clear with us,” Adams says.

Last year, Synlait’s lower-than-market advance payouts were hard on its farmers.

But, Adams says: “I’ve spoken with a lot of farmers in the past two months, they said do two things; pay a good advance rate, and get the balance sheet de-leveraged so we have got good visibility and security for the future, and you can rest assured we will stay with Synlait.

“I’m looking forward to concluding this, and I genuinely don’t think we will lose a lot of them.”

“I asked farmers quite a few times recently; ‘If we weren’t in the market, do you think the advance rates being paid this year would be the same?’ The answer was a categorical ‘No’. The market has caught up to be sure, but we have dragged the market into a very competitive position, and we continue to do that,” He says.

“That’s one reason they have been very loyal to us.”

The banks could have pulled the plug already, but they have given you time.

“Our banks have been terrific, I have to say,” Adams says.

“ANZ, who is the lead of the syndicate, have been awesome. Very understanding. Very flexible. They know we’ve been working, God knows, every hour for the last three months to try to resolve this satisfactorily, especially for creditors.”

Adams does acknowledge, however, that politically, pulling the plug on Synlait would not have been a good look.

This is a big capital commitment - $18m- for Bright Dairy, which will once again become Synlait’s majority shareholder. Why are they doing this?

No company should be put into receivership that has shareholders willing to invest millions in it, says Adams

“It wouldn’t make any sense. This company has to be a going concern. We are just lucky to have secure and committed shareholders,” he says.

Bright, which is based in China, is a survivor. It traces its history to 1911, the year the Chinese Revolution was launched.

Adams sees a parallel between it, and many New Zealand farming businesses.

“The parallel with Bright is they are a multi-generational business. The chair of the Bright Food Group very quietly said to me, ‘You have to realise, Mr Adams, that we have very patient capital’, which is a cool thing to say, actually,” Adams says.

“They describe themselves as being strategic shareholders. They see challenges as episodic, and they are comfortable that the business is fundamentally a very sound one, and that we have a strong future,” he says.

“They’re actually very like many of our farmers. We have multi-generational ownership across the agri-sector in New Zealand.”

A few months back, there seemed to be a lot of bad blood between Synlait and A2 Milk. Now, it is backing this rescue plan, and contributing $33m to the recapitalisation. A big turnaround?

“I came into that, and in fact, before I took the role, I went and had a cup of coffee with the chair of A2, and Pip [Greenwood] and I recognised there really wasn’t any future in us having a scrap, and really no need for that,” Adams says.

“So, we agreed to sit down as two businesses, and try to settle our differences, which we managed to do.

“I’m really pleased with that, because they are a great business. They have rebuilt themselves, and are going from strength to strength.”

Will you know before the September meeting whether you have the shareholder backing you need to carry the vote?

“What is the old saying in politics? Never ask a question you don’t know the answer to,” he says.

The board knows it has the backing of Bright for the vote on allowing A2 to inject capital. It has A2’s backing for the vote on the Bright capital injection, but it still doesn’t yet know which way many retail shareholders will vote.

But Adams seems confident, and the board will be talking with shareholders in the remaining days before the votes, gathering intentions, so it may be when Adams takes the stage at Synlait’s Dunsandel plant for the meeting, he knows whether the rescue plan will get over the line.

“You’d very much like to know that before you go in there,” he says.