Synlait and a2 Milk bury the hatchet, a2 to support capital raise

Synlait and a2 Milk have resolved their contract differences. Photo / Supplied

Cash-strapped Synlait Milk and its main customer, a2 Milk, have conditionally agreed to resolve their contract disputes.

In addition, infant formula company a2 Milk, which owns just under 20% of Synlait, said it would support the company’s upcoming capital raise.

Synlait is a2 Milk’s main 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 a refinancing of its existing banking facilities.

A2 Milk first raised the contract issues last December.

Synlait chief executive Grant Watson said settling the disputes was another positive step forward in the company’s business recovery plan.

Last month, Synlait’s shareholders voted in favour of a $130 million loan from the company’s biggest shareholder, China’s Bright Dairy.

“With the disputes behind us, we are pleased to be able to confirm to our shareholders the a2 Milk Company’s support for our upcoming equity raise,” Watson said in today’s release.

“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,” he said.

Synlait has agreed that the exclusivity it has under the Nutritional Powders Manufacturing and Supply Agreement (NPMSA) for “a2 Platinum” formula and other nutritional products will cease to apply from January 1, 2025; however, Synlait expects to continue to produce all products under the NPMSA in the short term.

Under the terms of today’s deal, Synlait will continue to hold the Chinese regulatory State Administration for Market Regulation (SAMR) registration (currently expiring September 2027), attached to its Dunsandel facility, after settlement takes effect.

Despite the exclusive supply arrangements ending, Synlait expects that a2 Milk’s China label products will continue to be produced at Synlait’s Dunsandel, Canterbury facility unless a2 Milk can obtain its own SAMR registration to manufacture those products.

Synlait will make available to a2 Milk an additional SAMR registration slot at Dunsandel for a potential new China label registered product.

A2 Milk and Synlait will work together to develop the new product, prepare the SAMR registration dossier and seek registration from SAMR by December 2029.

As part of the settlement, Synlait said a2 Milk will make a one-off payment to Synlait in the order of $24.75 million.

That payment included amounts that had largely been withheld in accordance with the terms of the NPMSA from payment pending resolution of matters in dispute.

Synlait said it was working to finalise the terms of the equity raise and the bank refinancing.

Shareholders will vote on the refinancing at a special meeting and more information will be set out in the notice of meeting, expected to be released this month.

“Provided the settlement conditions are satisfied, the arbitration to resolve the disputes will end,” Synlait said.

In the meantime, the arbitration hearing for exclusivity and other matters had been adjourned.

The a2 Milk Company had agreed to support and subscribe to an equity raise.

Bright Dairy fully supports Synlait raising equity capital.

China-owned Bright Dairy has long been a supporter of Synlait throught its various troubles over the years.

In a recent interview with the Herald, Bright Dairy’s chairman Huang Liming said both a2 and Bright Food wanted Synlait to stabilise.

“Without Synlait, there would not be prosperity for a2 Milk,” Huang said.

“From our own perspective, Synlait and a2 should be like brothers and sisters,” he said.

Shares in Synlait, which have been under extreme pressure for the last 12 months, jumped by 18% on the news to 35.5c.

A2 Milk, which reports its annual result on Monday, saw its share price gain 20c or 2.7 per cent to $7.62.

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