Pressure on Synlait’s Independent Directors Ahead of Capital...

Pressure on Synlait’s Independent Directors Ahead of Capital Raise

By Duncan Bridgeman

NZME Business Managing Editor · NZ Herald

16 Aug, 2024 03:00 AM · 7 mins to read

Synlait Milk’s three independent directors face the complex task of ensuring the company’s survival while also doing right by its beleaguered shareholders who are not associated with Bright Dairy or the a2 Milk Company.

Any day now, the company will announce plans for a capital raise and bank refinancing, partly to address $180 million in bonds that are due in December. With a market capitalisation of just $62 million, Synlait needs to raise funds in the hundreds of millions.

“The task ahead is a complicated one,” said independent chairman George Adams after last month’s special shareholder meeting to approve a last-minute $130 million lifeline loan from Bright Dairy. “It is certainly challenging to have that conversation with retail shareholders, and even with institutions, frankly. We need to carefully craft a solution that delivers sufficient capital into the business and provides a high degree of assurance that we can raise it, which obviously means talking to our larger shareholders.”

The easiest way to execute this might be a direct placement at prices reflecting current market value to interests associated with Bright Dairy, which controls the board with its 39% shareholding and has shown a tendency for brinkmanship. It’s hard to imagine this plan not involving a2 Milk, which holds 19% and would love to get its hands on Dunsandel, Synlait’s “golden goose.”

The key issue for both retail shareholders and institutions, which make up around 41% of Synlait’s shares, is that the current share price is far from the intrinsic value of the company. The market has lost confidence in both the board and management, which may help convince independents to accept a highly dilutive deal. But Synlait’s assets are worth just over $600 million, meaning the business could be worth more in liquidation.

Decision Time

It will be interesting to see how Adams and his fellow independent directors, Paul McGilvary and Paul Washer, manage to balance the company’s growth potential with the interests of all shareholders, not just Bright Dairy and possibly a2 Milk. One option could be a renounceable pro-rata offer allowing everyone to participate. However, small shareholders might prefer a liquidation scenario, where a2 Milk would likely bid for Dunsandel, potentially wiping out Synlait’s debt.

Currently, virtually all of a2 Milk’s infant formula is manufactured by Synlait at Dunsandel, and Chinese regulations mean it probably will continue to be.

Synlait is undoubtedly in serious financial trouble. The market chatter suggests the equity capital raise could exceed $200 million. Bright Dairy, having injected $130 million recently, could push to take control through a simple placement. A2 Milk will likely need to be part of that conversation. Given the potential dilution, a shareholder vote will be required, along with an independent appraisal report.

A Profit Lift for A2?

Forsyth Barr analyst Matt Montgomerie suggests that a2 Milk is poised for a strong result when it reports on Monday. “Our data points to strong market share gains, particularly in the offline channel, and solid brand health metrics,” Montgomerie said. While he expects a robust 2024 result, with ongoing strong earnings per share growth in 2025, he warns that sustaining the recent share price strength leaves little room for negative surprises.

Market expectations are for a2 Milk to report a net profit of around $172 million for the June year, up from $155.6 million a year earlier.

Moutter’s CBA Pay Packet

Former Spark chief executive Simon Moutter, now chairman of Kāinga Ora, is likely earning much less in that role compared to his position on the board of the Commonwealth Bank of Australia (CBA), Australia’s largest bank. CBA’s annual report revealed Moutter earned A$372,906 (NZ$407,091) in the year to June 2024, up from A$355,810 (NZ$388,427). He also received NZ$50,000 for consulting services to CBA subsidiary ASB Banking Ltd Technology Advisory Group.

Moutter’s pay as Kāinga Ora chairman won’t be known until its next annual report, but his predecessor, Vui Mark Gosche, was paid $98,000 for the job. Moutter also chairs three privately-owned companies: Smart Environmental Group, Les Mills International, and Designer Wardrobe.

Investors Downbeat on Local Market

New Zealand investors are feeling pessimistic about the local share market but more confident in overseas markets, according to a Chartered Accountants ANZ survey of 500 small investors. Confidence in domestic capital markets dropped from 77% to 73%, down from 83% during the height of Covid-19 in 2020. Meanwhile, confidence in overseas markets climbed from 64% in 2020 to 81% in 2024.

Despite this, 53% of investors said they plan to increase their investments over the next year, down just 3% from last year. When asked where they have the most confidence, investors listed term deposits, KiwiSaver, property, and bank savings, with shares in private companies and the stock market further down, followed by crypto in last place.

- Additional reporting by Jamie Gray and Tamsyn Parker