Saturday, April 13, 2024

A2 Milk’s move against Synlait: the MVM factor

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Licences and supply chains to the fore as dairy companies lock horns.
Any commentary around the US infant formula market and the liquid milk business will be of interest, analysts say.
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A2 Milk’s move to cancel its exclusive manufacturing and supply agreement with Synlait may be all about getting Mataura Valley Milk into the black.

A2 Milk owns 75% of Mataura Valley Milk (MVM) in partnership with China Animal Husbandry Group, which owns 25%. It bought the Southland dairy company in 2021 for $268.5 million to provide “supply diversification”.

In the year to June 30, MVM reported earnings before interest, taxes, depreciation and amortisation loss of $26.5m. That was wider than the $18.8m loss in the prior year.

A2 Milk has consistently said accelerating MVM’s path to profitability by FY26 or earlier is a key strategic priority.

On Monday, a2 Milk said it had notified Synlait that it was cancelling the exclusive supply rights because Synlait had fallen below delivery standards.

The deal covers stages 1 to 3 of a2 Milk’s current infant milk formula products sold in China, Australia and New Zealand.

Synlait, meanwhile, came out swinging and said it disputes that a2 Milk has the right to cancel the arrangements.

It also underscored that it continues to hold the Chinese regulatory State Administration for Market Regulation (SAMR) licence, which is attached to Synlait’s Dunsandel manufacturing facilities.

The licence is for a2 Milk’s Chinese-labelled infant formula.

While a2 Milk can’t currently produce that formula without Synlait, the removal would give it the option to produce a2 Platinum, the brand of its current English label product, at any facility in the future, including MVM, it said.

In the past, a2 Milk has clearly indicated its intent to obtain additional China-label infant milk formula registration and to leverage its manufacturing capability MVM.

“A2 has had ambitions to gain more control of its supply channel, particularly with regard to obtaining another licence for launching a second China-label product, so perhaps this shouldn’t be a complete surprise,” Craig Stent, executive director of portfolio manager at Harbour Asset Management, said.  

He noted, however, that it currently only impacts a2 Milk’s English label, with the SAMR regulatory licence sitting with Synlait.

“With the removal of the exclusivity, it may give a2 the option to produce its English label through Mataura Valley Milk; however, this is likely to be gradual,” he said.

Neither a2 Milk or Synlait is expecting an overnight change.

A2 Milk expects any dispute resolution process to “take some time to complete” and will maintain the exclusivity until the dispute is resolved, assuming it is resolved by the end of 2024.

Synlait Milk said the announcement has no impact on its FY23 financial result, due to be reported on September 25.

It also said the announcement is not expected to impact Synlait’s full-year 2024 results.

Synlait expects to manufacture Chinese-labelled products for a2 Milk for the period of the SAMR licence, which currently expires in September 2027.

Matthew Goodson, managing director of Salt Funds Management, expects an extended period of negotiation given that a breach of contract has been alleged in regard to Synlait’s product delivery.

This may mean a2 moves some English-label production to its Mataura Valley plant.

“I would read it as a sensible but hard-nosed negotiating position from a2, with Synlait’s extended balance sheet potentially being problematic.”

Goodson noted that Synlait has a $180m bond that matures in December 2024. It was issued at 3.83% but last traded at 15.72%.

Synlait’s shares ended down 9.4% at $1.16 on Monday, while a2 fell 1% to $4.88. 

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