World turns sour for dairy firm Bellamy's

When things go wrong for a company, they usually get worse before they get better - if they ever do get better.

So it is with Bellamy's Australia, the organic milk company whose shares crashed before Christmas after it revealed its sales in China had sagged.

It's a cautionary tale for investors who are tempted to snap up shares in a company in the hope they've got a bargain.

Once a market darling with a sharemarket value of more than A$1 billion based on hopes it could tap into growing Asian demand for quality Western food, Bellamy's said in early December that it had suffered a "temporary volume dislocation" in China and its share price halved.

It kicked off the New Year with the news chief executive Laura McBain was leaving and followed up last month's profit downgrade with another.

It announced operating earnings will be somewhere between A$22 million and A$26m - about half the A$46m analysts expected.

Unsurprisingly, the share price fell a further 40 per cent, although it's bounced back a bit since then.

Bellamy's provided the same sort of excuses that it did before Christmas - lower-than-expected sales, manufacturing shortfall payments, increased costs of organic ingredients and additional marketing spending.

But the company's problems are far from over.

It's facing a shareholder revolt, with Kathmandu founder Jan Cameron leading a charge to overthrow the board.

Cameron and her supporters, including key investors such as Graham Cureton, the mysterious Black Prince Foundation and Melbourne stockbroker Hugh Robertson, own 35 per cent of Bellamy's shares between them and want the board to call an extraordinary general meeting to give investors a chance to throw them out.

"Nothing has changed. All I saw yesterday was staggering arrogance on the board's part in not acknowledging any negligence and not accepting any responsibility for this debacle," Cameron told reporters after the latest profit downgrade.

It's hard to disagree with Cameron, who argues that McBain is a scapegoat and the board kept her on just long enough to renegotiate a supply contract with Fonterra.

This contract points to another problem Bellamy's is facing - whether it becomes a takeover target.

Fonterra supplies Bellamy's with infant formula blends and mixes. Fonterra has agreed to extend the five-year deal to eight years, but still supply the same amount of product, which will help Bellamy's deal with its problem of too much stock.

But it has added an interesting clause to the contract. Fonterra can end the agreement should any person or group acquire 30 per cent or more of Bellamy's shares.

This looks as if it's in there to deter any of Fonterra's rivals making a takeover bid, such as Bega Cheese.

In McBain's place, Bellamy's has appointed chief operating officer Andrew Cohen in an interim capacity.

A former management consultant with Bain & Co, Cohen is well thought of, but it's hard to do any more than try to steady the ship if you aren't a permanent appointment.

The company has also moved its chief financial officer and made an acting appointment instead.

So all up, we have a company that's a potential takeover target, overseen by a board that is fighting for its survival in the face of a shareholder revolt and a CEO who is only acting.

Investors would be entitled to ask whether directors and executives are focused more on fighting for survival than fixing the problems.