Trans-Tasman dairy company A2 Milk says it is holding “various discussions with a number of parties” about transforming itself from being solely a brand owner to manufacturer.
Chief executive Geoff Babidge confirmed the talks in a statement on Monday after DataRoom revealed the company was understood to be one of the final contenders in the competition to buy the $NZ400m ($375m) Mataura Valley Milk company in New Zealand.
“The A2 Milk Company Limited notes media speculation in relation to potential corporate activity involving a2MC,” Mr Babidge said.
“While it is A2 Milk’s policy to not respond to media speculation, A2 Milk confirms it has had, and continues to have, various discussions with a number of parties in relation to potential strategic options relating to participation in manufacturing capacity and capability as stated in our half year results announcement on 27 February 2020.
“A2 Milk confirms that it is in compliance with the listing rules and will continue to keep the market informed in accordance with its disclosure obligations, including if and when any such discussions were to reach a conclusion.”
A2’s board has been considering whether to transition from brand ownership to manufacturing for the past five years. As its shares surged to a record high, the company has been looking at potential manufacturing investments over the past five months.
The company already has a 19.8 per cent stake in Synlait Milk, which produces its infant formula and is looking at similar partnerships, hence the appeal of Mataura.
China Animal Husbandry Group owns 78.6 per cent of Mataura Valley Milk – which is based in Gore in New Zealand’s South Island and produces a range of nutritional milk powders, including infant formula – with local farmers owning the remainder of the company held in small shareholdings.
This potentially enables A2 Milk to acquire a 21 per cent stake in the company, which lost $NZ10m in year to December 2018 – its latest financial accounts – and generated $NZ18.8m in revenue.
But A2 could double that stake, given China Animal Husbandry Group’s shareholding could call to at least 60 per cent under the terms of a $NZ115m loan Mataura has with China Construction Bank Corporation.
Matuara has been under financial pressure, with it seeking a strategic investor since late last year after it warned it needed an urgent cash injection to maintain operations beyond May 31 this year, with Macquarie Capital and DG Advisory appointed to manage the process.
“Current projections indicate the company will exhaust its existing bank facilities in September 2019, and needs an additional $12m ($11.25m) in funding over the period through to May 31, 2020,” the company wrote in its financial accounts in the year to December 2018.
Shares in A2 slipped 2.3 per cent on Monday, to $18.14.