Why A2 Milk needs to pay attention to the Bubs stoush

At A2 Milk it is easy to dismiss Bubs as a minnow, with a market value of $130m, but a push to install Peter Nathan as CEO should make it pay more attention.

It’s easy for A2 Milk to dismiss Bubs a minnow that doesn’t represent a serious competitive threat.

After all, A2 has a market cap of $3.64bn, compared with Bubs’s $131.5m, making it merely a mosquito buzzing around the campfire of what is becoming an increasingly heated infant formula market.

Then there is the corporate drama gripping Bubs, with founder Kristy Carr calling for a board spill after she was sacked as chief executive last month.

But A2’s management, led by chief executive David Bortolussi, should be watching Bubs closely, particularly the case if the spill is successful.

Carr - who is leading a group of dissident shareholders, which own about 5 per cent of the company - plans to install former A2 Milk Asia Pacific boss Peter Nathan as Bubs’ next chief executive if her renegade action wins support from the majority of her fellow investors.

This should be enough for A2 Milk to reach for mosquito swat. Nathan is intimately familiar with A2’s operations, particularly its China business.

And, it was not that long ago when A2 Milk was seen as a disruptor in the dairy market, dismissed by the likes of Fonterra and Nestle. Now those food giants have either partnered with A2 or launched their own line of products containing the A2 beta casein protein.

The risk for A2 is that Nathan is successful in turning Bubs around. He was recruited from Freedom Foods by former A2 chief executive Geoff Babidge more than a decade ago when A2 was branded a nuisance, with its larger competitors branding it a snake oil merchant.

But A2 had the last laugh when during the 2010s its share price surged, hitting a high of $20 in mid 2020. At that time, it had a market value of $13bn – twice as big as Qantas’s then market capitalisation.

Then Covid-19 hit, and pandemic border closures sparked the collapse of the Chinese daigou or reseller market, fuelling a 75 per cent slump in A2 share price.

A2 Milk boss David Bortolussi.

Under Bortolussi, A2 has been scrambling to regain ground, but investors have so far been cautious. Since Bortolussi’s appointment in February 2021, A2’s shares have more than halved from $10.36 to $4.97. In the past six months, its shares have shed more than 29 per cent.

While A2 has a leg up on Bubs with Beijing renewing its China label registration under the new GB guidelines, it still appears a shadow of itself from its glory days of the 2010s when Nathan was the toast of the Australian investment community.

At times of distress, it’s easy to put on the rose-tinted glasses and look at the days gone by with more fondness – something that Nathan will no doubt be seeking to exploit. And this also should be a concern for Bubs chair Katrina Rathie as she defends her position at the company ahead of the board spill scheduled for July 27.

Bubs is ripe to regain its position as a challenger once its boardroom drama is resolved. A2’s US business is in disarray after the departure of long-serving American boss Blake Waltrip last month. Its home market in Australia and New Zealand has also been upended after local general manager Kevin Bush relocated to the US to replace Waltrip.

In New Zealand, its Mataura Valley Dairy (MVM) business, which operates an infant formula factory, has also had a reshuffling of its executive ranks after MVM chief executive Bernard May also left the company.

Meanwhile, after complaining about the delay in the US Food and Drug Administration granting it temporary import approval to help alleviate America’s infant formula shortage, A2 Milk is yet to export a tin of the product to the US.

At the same time, the US is the one bright spark at Bubs. Bubs was one of the first companies to receive import approval from the FDA in May last year – leapfrogging A2 by six months – and received an endorsement from US President Joe Biden as part of his Operation Fly Formula.

On Wednesday, Bubs issued a trading update revealing that it has recently marked its first $1m month on Amazon’s US site in May, sending its shares surging more than 31 per cent. It is now forecasting its US business to generate revenue of $20m-$22m this year, compared with $8.2m last year.

Bubs has also recruited leading Australian agribusiness dealmaker David Williams to assist in a strategic review of its operations.

Williams is best known from brokering deals such as the Incitec Pivot merger, the sale of Orica’s chemical business to Nufarm and Nufarm’s chemical trading business to Orica, and engineering the deal that returned Vegemite to Australian ownership via Bega Cheese’s $460m of Mondelez’s grocery business.

He also bought Tassal for $42.5m from receivership in the mid-2000s, before floating it on the ASX a year later. He then advised Canadian seafood giant Cooke in its $1.7bn takeover of Tassal last year. His presence at Bubs should give A2 another reason to take the company more seriously – even if Nathan isn’t installed as chief executive.

In many respects, Bubs looks a lot like A2 did 10 years ago – even if much of Bubs’s messaging has been style over substance to date.