Synlait’s China-led rescue plan sails through after late backing from A2 Milk

Dairy group Synlait has secured critical backing for its China-led rescue plan days ahead of a debt deadline after supplier and shareholder A2 Milk indicated its support at the eleventh hour.

About 99.6 per cent of Synlait shareholders voted in favour of securing a rescue loan from major Chinese investor Bright Dairy. Picture: Bloomberg

Dual-listed dairy group Synlait has secured critical backing for its China-led rescue plan days ahead of a debt deadline after supplier and shareholder A2 Milk indicated its support at the eleventh hour, but there are uncertainties ahead.

About 99.6 per cent of Synlait shareholders voted in favour of securing the crucial $NZ130m ($118m) rescue loan from major Chinese investor Bright Dairy to repay its bankers the full amount due on July 15.

The loan is via Bright Dairy International Investment, a subsidiary of Synlait’s 39.01 per cent shareholder Bright Dairy Holding.

Proxy results, included in chairman George Adams’ address before the vote, showed 56.96 per cent of the votes were cast in favour of the resolution. Its 19.8 per cent stakeholder A2 Milk only indicated its support on Thursday morning – after proxy votes had been counted.

Synlait shares surged on the news, closing up 43.5 per cent at 33c each, but still well down from their highs around 91c in January.

But A2 Milk’s statement included a warning about “concerns” it had with Synlait’s recapitalisation plan amid ongoing discussions.

That recapitalisation plan includes a proposed equity raise, which will be used for deleveraging, including the repayment of $NZ180m in retail bonds. The details of this plan will be shared in August. Completion of Synlait’s equity raise is expected to occur contemporaneously with a refinancing of existing banking facilities.

Synlait reported outstanding loans and borrowings of $NZ585m as at May 31, including $180m of bonds.

Independent expert Northington Partners, which undertook an assessment of the loan from Bright Dairy ahead of the vote, concluded that the terms and conditions are “fair” to Synlait shareholders not associated with Bright.

“Over the last few years, the company has also experienced considerable earnings volatility with compressed margins for its key nutritional products,” its report states.

Relative to current earnings guidance for the 12 months to July 31 of $NZ45m-$NZ60m, the current debt level is unsustainable “even if earnings could be improved in the short term”.

Shareholders will be voting again in August or September on the equity raise – ahead of the company’s full year results, which are due in September.

“a2MC continues to have concerns and will engage in discussions with Synlait in the coming weeks,” A2 Milk said in its statement.

While the producer of infant formula and dairy powder has been desperate to sell assets, Synlait is also locked in various battles with A2 Milk.

Synlait has the exclusive rights to produce A2 Milk’s infant formula, including the China Label product where Synlait holds the registration required by the Chinese government. But as part of A2 Milk’s move for greater control of its supply chain, it has told Synlait it is looking to remove Synlait’s exclusivity to produce its infant formula.

Synlait holds the licence to produce A2’s largest product, being China Label IMF, which accounts for about 50 per cent of A2 Milk’s total IMF sales.

After the vote, Mr Adams thanked shareholders for their support saying the loan resolution was “very important to Synlait’s future and completed the first step in resetting Synlait’s balance sheet”.

“We look forward to providing you with further updates as the board progresses its plans for an equity capital raising,” he added.

“Synlait’s core Advanced Nutrition and Foodservice businesses have enormous growth

potential, and we are committed to delivering on that for your benefit.”

Bright Dairy representative on the Synlait board, director Julia Zhu said: “There is a stronger, healthier future for the business coming and Bright Dairy is deeply committed to ensuring the Synlait’s long-term success for all shareholders and its farmer suppliers.”