Synlait Milk’s pivotal $217m recapitalisation inches closer

Synlait will hold a pivotal shareholders meeting on Wednesday. Photo / NZ Herald

Synlait Milk’s $217.8 million recapitalisation plan, which goes before shareholders at a special meeting tomorrow, is looking like a done deal.

The plan, an integral part of the company’s mission to restore its balance sheet and pay off debt, involves the issue of $185m worth of shares to China’s Bright Dairy at 60c a share and $32.8m worth to a2 Milk at 43c a share.

If approved, Bright’s holding will go from 39.01% to 65% while a2 Milk’s stake will remain at 19.8%.

Neither Bright nor a2 Milk can vote on their own placements but they can vote in favour of each other’s, which is what they intend to do.

On that score, the success of the a2 Milk placement looks assured because it will have Bright’s backing.

However, it is still possible for minorities to derail the Bright placement as a2 Milk will control only a third of the shares that can be voted.

The complex recapitalisation plan - which has its detractors - requires a successful sequence of events to get it over the line.

The New Zealand Shareholders’ Association (NZSA) has been critical of the targeted placements, as they will dilute ownership for minority shareholders.

However, the NZSA has come around, and has said it will vote proxies in favour of the deal.

But there is no escaping the heavily dilutive impact on non-Bright and non-a2 Milk shareholders.

It means that minorities will hold 14.9% of the shares compared with 41.2% of the shares at present.

“This proposal will now leave minorities having to rely on the good governance intentions of directors and the positive patronage of Bright Dairy,” it said.

NZSA chief executive Oliver Mander said the association had been enouraged by a message from Bright, to the effect that it would strongly advocate to ensure shareholders were given an opportunity to participate in the next capital management initiative to improve liquidity in the stock and to drive future growth.

Early this month, the Takeovers Panel said it would “take no further action” over the plan following a complaint from John Penno, who co-founded the company and who remains a significant shareholder.

Synlait chair George Adams. Photo / Supplied

Synlait chair George Adams said elements of the recapitalisation were “inter-conditional” - among them being an agreement by Synlait and a2 Milk to settle a supply contract dispute.

“There are the two placements, the changing of the constitution, the refinancing, and then there is the a2 Milk dispute settlement.

“All of these things hang together, so this is another reason why it will be such a pivotal day for the business,” he told the Herald.

“If any one of them fails, then they all fail.”

Yesterday Synlait reached a new agreement to secure a $450m facility with eight banks.

Once the deleveraging is out of the way, Synlait would turn its attention to how it can rebuild the business.

“Then it becomes the 100% focus on customers, efficiency and profitability.”

The source of Synlait’s woes - an underperforming near-new plant at Pōkeno - is running at about one-third of its capacity.

Pōkeno needs to get capacity use to over 50% to deliver a profit, he said.

Adams acknowledged the pushback from the NZSA and Penno.

“Ultimately we have done our best to explain the challenge of the position that we are in.”

Adams has in the past said the already stretched share price would not have been able to handle a deeply discounted rights issue to all shareholders.

On minority shareholders missing out, Adams said a retail shareholder with $10,000 worth of shares would be up for $37,000 if the recapitalisation was via a rights issue to all shareholders.

Synlait’s share price began showing signs of life once the plan, which will involve settling $180m of bonds that fall due in December, was set in train.

The shares now trade at around 41.50c, up from just 28c a month ago.

Synlait’s other main assets - its Dunsandel manufacturing plant and its consumer business, Dairyworks, are profitable.

This week, Synlait said it had completed the strategic review of its North Island assets, including its manufacturing facility in Pōkeno and its blending and canning facility in Auckland.

Chief executive Grant Watson said Synlait had found a pathway to profitability for its North Island operations.

One of the review’s findings was that switching between processing plant-based proteins and dairy hindered Pōkeno’s efficiency.

As a result, Synlait had decided to focus Pōkeno’s operations solely on producing advanced nutrition products which do not require raw milk.

The Dunsandel facility will remain the hub of the business for dairy operations.

Synlait has 54 farmer suppliers in the Waikato and the company will meet all of its contractual obligations to them, including incentive payments.

They will remain Synlait suppliers but Open Country will be collecting and processing their milk.

Synlait said it would not actively seek a buyer for Pōkeno.

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