High-stakes dairy drama

Company News

by Glenn Dyer

A high-stakes game of dairy "Russian Roulette" is unfolding across the Tasman between struggling Synlait (ASX:SM1) and its once-close buddy and customer (and shareholder), a2 Milk (ASX:A2M).

After years of closeness, the duo has fallen out badly. Synlait has faced hard times, with revenue and profit margins under pressure or disappearing, and the company needing cash—$NZ130 million—to repay a loan due on July 15.

In September last year, a2 Milk gave notice of the planned "cancellation of Synlait's exclusive manufacturing and supply rights due to Synlait's delivery in full and on-time performance (DIFOT) during FY23 falling below the level required for Synlait to maintain such exclusive rights, as referenced in a2MC's market announcement in April 2023."

This move will enable a2 Milk to increase production at its own factory.

The split and concerns about Synlait’s overall performance have caused the shares to collapse—down 84% in the past year—putting enormous pressure on its finances. Consequently, it needs the cash to repay a debt due next Monday.

The only potential source, after banks and other sources declined, is its 39% shareholder, Bright Dairy Holdings of China, through its subsidiary, Bright Dairy International Investment.

To obtain the money, Synlait shareholders need to vote on the loan because it is a related-party transaction, which means Bright Dairy cannot vote its shares.

The meeting to consider and, hopefully, approve the loan is set for this Thursday, July 11.

This situation has put a2 Milk in the driver's seat with its 19.98% holding in Synlait—if it votes ‘yes’, the money can be received and the loan paid off. If it votes ‘no', then it could mean trouble for Synlait, unless the holders of the $NZ130 million loan offer more time.

Despite less-than-rosy relations between Synlait and a2 Milk over the past year or so, one would think supporting the loan would be in a2’s best interest.

However, a2 Milk seems to be playing hardball (what does it want in return?), and on Monday Synlait was forced to issue a statement to exchanges on both sides of the Tasman, revealing that a2 Milk had yet to signal its voting intentions.

"As communicated in the Notice of Meeting, Synlait committed to updating shareholders on The a2 Milk Company Limited's voting intention.

"Synlait and The a2 Milk Company Limited have continued to engage in discussions. However, The a2 Milk Company Limited has not advised Synlait how it will vote on the resolution,” Monday's statement said.

Synlait Chair George Adams said in the release that: “The shareholder loan resolution is very important to Synlait’s future, and we encourage all our shareholders, no matter the size, to have your say and vote on this important matter. It is particularly important that everyone cast their vote as the future of the company is at stake and failure to approve the loan will mean the Board have limited options available to them.”

"The Independent Directors of Synlait have unanimously recommended that shareholders vote in favor of the resolution. Bright Dairy cannot vote in favor of the resolution; as such, the Directors appointed by Bright Dairy have abstained from making a recommendation.

"The deadline for returning proxy votes is 2:00 pm tomorrow (Tuesday, July 9, 2024). Shareholders wishing to lodge a proxy vote are strongly encouraged to do so.

Glenn Dyer

Glenn Dyer has been a finance journalist and TV producer for more than 40 years. He has worked at Maxwell Newton Publications, Queensland Newspapers, AAP, The Australian Financial Review, The Nine Network and Crikey.

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