Synlait and a2 Milk Bury the Hatchet, a2 to Support Capital...

Synlait and a2 Milk Bury the Hatchet, a2 to Support Capital Raise

By Jamie Gray, Business Reporter - NZ Herald

16 Aug, 2024 10:38 AM | 4 mins to read

Cash-strapped Synlait Milk and its main customer, a2 Milk, have conditionally agreed to resolve their contract disputes. Additionally, a2 Milk, which owns just under 20% of Synlait, will support the company’s upcoming capital raise. Synlait is a2 Milk’s primary supplier of formula.

“The a2 Milk Co is pleased to confirm that it has conditionally resolved the various disputes subject to arbitration with Synlait Milk, including the exclusivity dispute, pricing disputes, and various other disputes,” a2 Milk said in a statement to the NZX. Today’s settlement is conditional on Synlait completing an equity raise and refinancing its existing banking facilities.

Synlait CEO Grant Watson noted that settling the disputes is a positive step in the company’s recovery plan. Last month, Synlait’s shareholders approved a $130 million loan from its largest shareholder, China’s Bright Dairy.

“With the disputes behind us, we are pleased to confirm a2 Milk’s support for our upcoming equity raise,” Watson said. “This marks genuine progress for Synlait—we are delivering on the turnaround actions needed to reset our performance and better position the company for the future.”

Synlait has agreed that the exclusivity under the Nutritional Powders Manufacturing and Supply Agreement (NPMSA) for “a2 Platinum” formula will end on January 1, 2025. However, Synlait expects to continue producing all products under the NPMSA in the short term.

Under today’s agreement, Synlait will retain the Chinese regulatory State Administration for Market Regulation (SAMR) registration, which expires in September 2027, attached to its Dunsandel facility. Despite the end of exclusive supply arrangements, Synlait expects a2 Milk’s China label products to continue being produced at Dunsandel unless a2 Milk obtains its own SAMR registration.

Additionally, Synlait will provide a2 Milk with another SAMR registration slot at Dunsandel for a potential new China label product. Both companies will collaborate on developing the new product, preparing the SAMR registration dossier, and seeking registration by December 2029.

As part of the settlement, a2 Milk will make a one-off payment of $24.75 million to Synlait. This amount includes funds previously withheld due to the NPMSA disputes.

Synlait is finalizing the terms of the equity raise and bank refinancing. Shareholders will vote on the refinancing at a special meeting, with details to be shared in an upcoming notice of meeting.

“If the settlement conditions are met, arbitration to resolve the disputes will end,” Synlait said. In the meantime, the arbitration hearing for exclusivity and other matters has been adjourned. a2 Milk has agreed to support and subscribe to the equity raise. Bright Dairy also fully supports Synlait’s capital raising efforts.

China-owned Bright Dairy has long supported Synlait through its challenges. Bright Dairy’s chairman, Huang Liming, emphasized the importance of stabilizing Synlait for both a2 and Bright Food. “Without Synlait, there would not be prosperity for a2 Milk,” Huang said. “Synlait and a2 should be like brothers and sisters.”

Shares in Synlait, which have been under pressure for the last 12 months, surged 18% on the news to 35.5c. a2 Milk, which reports its annual results on Monday, saw its share price rise by 20c, or 2.7%, to $7.62.

Jamie Gray is an Auckland-based journalist covering financial markets and the primary sector. He joined the Herald in 2011.