Fix or fail at Freedom Foods

Western Sydney businessman Tony Perich (right) and Rory Macleod at their dairy.

The billionaire Perich family must be ruing the day chief executive Geoff Babidge left the company a decade ago to run a fledging dairy outfit, replacing him with their “strategic director” Rory Macleod.

Mr Babidge went out to create a market darling in A2 Milk, while Mr Macleod resigned from Freedom Foods in June after the board identified a series of accounting discrepancies, which it revealed on Monday had cost the company more than half a billion dollars in writedowns.

Freedom is now embarking on a $280m capital raising to repair its balance sheet, but analysts say a further capital injection will be needed early next year, fuelling investor fears of a “large dilutionary event in the future”.

Making matters worse is knowing that this mess could have been avoided. Five years ago, under Mr Macleod’s leadership, Freedom and majority shareholder Tony Perich sold their 117 million shares in A2 Milk for $93m at an average price of 77c a share, following a failed and bitter takeover attempt for the dairy company.

On the surface, it seemed like a windfall, considering Freedom spent $1m on forming a joint venture with A2 Milk, which turbocharged the company’s launch in Australia and Asia.

But had they held on to their stake and sold at A2’s high of $20.05 earlier this year, they would have reaped $2.3bn — more than enough to repair their balance sheet without tapping the market for more cash, with plenty of change left over to turn the business around. Even if they sold their holding on Tuesday at A2’s share price of $13.63, they would have still made $1.6bn — a 17-fold increase on their 2015 exit price.

Adding to the pain, Freedom in 2018 launched its own range of A2 UHT milk and infant formula, which both failed to gain traction in the market and are now among the products that Freedom has wiped millions of dollars off the value of.

Despite being in a trading halt, Freedom waited until after the close of market late on Monday to reveal that an internal accounting investigation had forced it to reinstate its accounts for the past two financial years and led to $590m in writedowns, or 70 per cent of its market capitalisation, $372.8m of which reflects changes to accounting policies and practices. A further $75.9m relates to writedowns of goodwill and brands, while $60.1m comprises “out-of-date, unsaleable and obsolete inventory”. The remainder, or $38.9m, accounts for a reduction in the value of capitalised new costs.

The Australian Securities & Investments Commission is investigating the company, which has said much of the writedowns relate to capitalisation costs not being treated as expenses, new products being sold below cost and accounting treatments being “based on unrealistic assumptions”.

The move has angered analysts and investors, and also put into question the role of independent auditors who sign off on company accounts each year to ensure their accuracy.

Chairman Perry Gunner and non-executive director Trevor Allen, who is chair of the Freedom’s finance and audit committee, both have confirmed they will step down at the company’s next annual meeting.

It came as the company dived $29m into the red, recording a net loss of $174.5m in the year to June 30. Interim chief executive Michael Perich said it was a “deeply disappointing” result.