A2 Milk deal boosts China ties
A2 Milk has gone deeper into manufacturing in a $250m deal in New Zealand aimed at appeasing the Chinese.
Trans-Tasman dairy brand A2 Milk has moved to strengthen its ties with China after acquiring a majority stake in a poorly performing infant formula producer that was searching for a buyer to fulfil its obligations to its Chinese financiers.
A2 Milk — which has called on the Morrison government to repair its damaged relationship with China, saying it has effectively punched Beijing in the face — has spent $NZ268.5m ($251.31m) on securing a 75 per cent stake in New Zealand infant formula producer Mataura Valley.
Mataura’s major shareholder China Animal Husbandry Group needed to sell down its holding to at least 60 per cent to meet the terms of a $NZ115m loan it had with China Construction Bank Corporation.
Mataura has been under financial pressure, seeking a strategic investor since late last year after it warned it needed an urgent cash injection to maintain operations beyond May 31, 2020, with Macquarie Capital and DG Advisory appointed to manage the process.
In a statement to the ASX, A2 Milk chief executive Geoff Babidge said the deal “strengthens our relationship with key partners in China”.
It comes after A2’s shares dived almost 20 per cent to $11.16 this month after it warned of a collapse in the lucrative Chinese daigou (trusted shopper) trade and slashed its full year revenue forecast by up to 28 per cent. “MVM (Mataura Valley) provides a unique opportunity to acquire a new world class nutritional products manufacturing capability in New Zealand, alongside a highly respected China state-owned enterprise in China Animal Husbandry Group,” Mr Babidge said.
China Animal Husbandry Group will retain 25 per cent of the business.
Despite Mataura facing significant financial pressure — it lost $NZ47.08m last financial year, and $NZ16.8m the year before that — Mr Babidge was confident that it could turn its fortunes around. The strategy hinges on positioning Mataura further up the value chain and injecting another $NZ120m into the business within three years.
“With the business currently producing a high proportion of commodity milk powder products, our plans for MVM (Mataura Valley) are to support its transition to being a manufacturer of predominantly consumer packaged nutritional products for A2 over the medium term,” Mr Babidge said.
“In the transitional period, MVM will continue to operate as a manufacturer of commodity powders and some base powders for nutritional products.
“We anticipate that during this period (FY22-24) the business will operate at approximately EBITDA (earnings before interest, tax and amortisation) break even, with the business returning a positive EBITDA from FY25, when significant nutritional volumes will be manufactured at the site.” The deal is subject to approval from the New Zealand Overseas Investment Office, with completion expected to occur by May 31 next year.
A2 has predominantly been a brand owner, relying on contract manufacturing.
The transition into manufacturing can be difficult to navigate.
Vitamin producer Blackmores learnt this lesson after it made the switch from brand owner to manufacturer last year when it acquired a factory in Braeside east of Melbourne for $43m from the US pharmaceutical giant Catalent.
Earlier this year Blackmores chief executive Alastair Symington said while the factory was “in good shape” it was expected to wipe $9.5m off full-year earnings. Morgans analyst Belinda Moore said while she expected the Mataura acquisition to dilute earnings per share and “increase the capital intensity” of A2, it made sense.
Ms Moore said it also reinforced A2 as a New Zealand company, which A2 has been talking up, despite its dual listing on the ASX, as tensions between Canberra and Beijing continue to escalate.
“We recognise the strategic benefits of diversification by supplier — currently with Synlait Milk and Fonterra — and it will further cement A2’s relationship with its Chinese partners, particularly important given Australia/China’s geopolitical tensions,” Ms Moore said.
“It further reinforces that A2 is a New Zealand company. We also think it will ultimately prove to be the correct move on the regulatory front as we expect that China regulations may eventually require brand owners to control the supply chain.
“Additionally it will allow A2 to launch new products overtime.”
Ms Moore said the acquisition also made good use of A2’s $854.2m cash “war chest”.
“The acquisition will be undertaken on a debt-free, cash-free basis and funded from A2M’s existing cash reserves,” she said.
“A2M is taking a long-term view with this investment.
“It believes that MVM gives the company a relatively new and world-class nutritional products manufacturing capability.”
More Coverage
How Rio’s powerplay is rewriting the rules of lithium
The mining giant’s $10bn bet has electrified the struggling industry. However, Rio will bring a different mindset to lithium.
Court backs Fortescue but judge unhappy with disclosure
Mining giant Fortescue has welcomed a Federal Court decision to throw out a request from its would-be ‘green’ steel competitor even though a judge questioned its commercial disclosure.