A2 Milk Strikes Peace Deal with Synlait, Sending Shares Sharply...

A2 Milk Strikes Peace Deal with Synlait, Sending Shares Sharply Higher

By Carrie LaFrenz, Senior Reporter

The a2 Milk Company has resolved a long-running dispute with Synlait Milk, allowing it to manufacture its own infant formula. As part of the agreement, Synlait will end an exclusivity arrangement in return for a payment of $NZ25 million ($22.6 million). This settlement enables a2 Milk to produce infant formula at its Mataura Valley processing plant, marking its first significant move into manufacturing. The company anticipates that this will lead to higher margins and better returns for investors.

The agreement also brings an end to the extended dispute between the two companies. Synlait, which supplies 90% of a2 Milk’s infant formula, also holds crucial licenses for importing the products into the lucrative Chinese market. A2 Milk owns a 20% stake in Synlait.

Last year, a2 Milk announced its intention to cancel Synlait’s exclusive manufacturing rights, a decision that Synlait did not initially accept. However, on Friday, both companies confirmed that these rights would expire by the end of this year. A2 Milk hopes that manufacturing its infant formula at the Mataura Valley plant, which has been posting losses, will help the plant break even.

Under the leadership of CEO David Bortolussi, a2 Milk has been gaining more control of its supply chain. Previously, the company only owned the intellectual property for its A1 protein-free milk, but in 2021, it acquired a 75% stake in the Mataura Valley plant.

Despite the end of exclusivity, Synlait will continue to produce a2 Milk-branded infant formula. Additionally, a2 Milk will pay Synlait $NZ24.8 million, largely in fees withheld during negotiations, and has agreed to higher pricing on certain products that Synlait manufactures for them.

Barrenjoey analyst Tom Kierath commented that the end of exclusivity would allow a2 Milk to introduce more products, which could support revenue growth. “Most infant formula companies have multiple products, enabling them to better target the differing needs of customers, and the end of exclusivity should support this, in our view,” Kierath said in a note to clients.

Following the announcement, shares in a2 Milk rose by over 4.9%, or 33¢, reaching $7.05 in early trade on Friday.

Synlait holds a key license required to import into China, linked to its Dunsandel manufacturing site. The company has agreed to provide space in the Dunsandel plant for a new a2 Milk product for China. Both companies will collaborate on this product and seek regulatory approval by 2029.

The resolution comes at a critical time for Synlait, which has been struggling with significant debt and is attempting to raise emergency funds. The deal with a2 Milk, which owns 19.8% of Synlait, is conditional on the equity raise being completed and banking facilities being refinanced.

A2 Milk confirmed that it has agreed to support and subscribe for shares in Synlait’s equity raise. The company stated that this decision underscores the strategic importance of continuing production at the Dunsandel site. A2 Milk also noted that the settlement would not affect its earnings for the past financial year, which the company expects to announce on Monday.

Barrenjoey’s Mr. Kierath indicated that he did not foresee any significant financial implications from the settlement, considering a2 Milk’s substantial cash reserves of approximately $NZ911 million.