A2 Milk unlikely to support Synlait recapitalisation

A2 Milk owns 20 per cent of Synlait.

The $5.4bn A2 Milk may have been supportive of Bright Foods providing a $NZ130m loan to Synlait, but a sweeping recapitalisation plan with a major equity raising is likely to be another story.

DataRoom understands that A2 Milk, which owns 20 per cent of Synlait, is unlikely to vote in favour of the raise and recapitalisation plan as it stands, and would allow its stake to be diluted before tipping in any more equity.

Some are interpreting its move as a negotiating tactic for more operational concessions from Synlait, but in reality it’s Synlait’s 39 per cent shareholder Bright Foods that will call the shots.

Market experts believe A2 Milk may be keen to buy at a bargain price Synlait’s state-of-the-art processing plant in Canterbury, New Zealand, which previous estimates suggest could be worth between $NZ400m and $NZ500m and is considered its best asset.

It comes after Synlait shareholders voted overwhelmingly favour of a $130m loan from Bright Dairy International to pay down debt due on July 15.

The Australia and New Zealand-listed producer of infant formula and dairy powder has been working to sell its assets, including its Dairyworks business, in a desperate quest to get cash through the door.

But this program is now on hold after failing to secure buyers at the right price.

A recapitalisation plan proposes an equity raise, which will be used for deleveraging, including the repayment of $NZ180m in retail bonds, and loan refinancings.

As reported, the details of this plan will be shared in August and shareholders need to vote on the deal ahead of its annual results delivered in September.

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

The loss-making company has had 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 looking to rebalance and take greater control of its supply chain, it has told Synlait it is looking to remove 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.

Likewise, A2 Milk is Synlait’s major customer and is also a large shareholder in Synlait.

A2’s reliance on the business in about five years will be far less after buying its Matura Valley Milk Plant in the South Island about three years ago, but will need to obtain a SAMR infant formula licence in China.

Another option is that Bright Dairy could acquire Synlait.

Synlait expects earnings before interest, tax, depreciation and amortisation to be at the lower end of $45m to $60m, excluding a non-cash adjustment of $17m.