NZX-listed A2 Milk expects its soon-to-be-acquired Southland milk processor Mataura Valley Milk to be earnings positive by 2025.
Mataura Valley, currently owned by China Animal Husbandry Group (CAHG), made a $47 million loss in 2019.
A2 Milk, which bases its product offer on dairy that is free of the a1 beta protein, first announced plans to buy a 75 per cent of Mataura Valley in August.
In a statement today, a2 Milk confirmed that it had entered into binding agreements to buy a 75 per cent interest in Mataura Valley for $268.5m.
CAHG will retain a 25 per cent interest.
The proposed acquisition would provide the opportunity for a2 Milk to make its own infant formula, instead of relying on its closely allied Synlait Milk for supply, while at the same time strengthening its ties with key partners in China.
The acquisition will be undertaken on a debt-free cash-free basis and funded from a2 Milk's cash reserves.
It is subject to approval of the Overseas Investment Office, with completion expected to occur on May 31, 2021.
CAHG is a wholly owned subsidiary of China National Agriculture Development Group, which is also the parent company of a2MC's strategic logistics and distribution partner in China, CSFA Holdings Shanghai, Co, Ltd. (China State Farm).
A2 Milk said the due diligence process had confirmed its reasons for buying Mataura Valley - namely the establishment of dual supply arrangements for nutritional products to complement its existing supply relationships that remain with Synlait and Fonterra.
"With the business currently producing a high proportion of commodity milk powder products, our plans for Mataura Valley are to support its transition to being a manufacturer of predominantly consumer packaged nutritional products for a2 Milk over the medium term."
A2 Milk said a blending and canning facility and associated infrastructure would need to be established, requiring an additional investment of about $120m over the first 2-3 years.
A2 Milk said an A1 protein-free milk pool in the Mataura area will be developed.
In the transitional period, Mataura Valley would continue to operate as a manufacturer of commodity powders and some base powders for nutritional products.
"We anticipate that during this period [2022-24] the business will operate at approximately EBITDA break even, with the business returning a positive EBITDA from full year 2025, when significant nutritional volumes will be manufactured at the site," a2 Milk said.
Shares in a2 Milk plummeted after the company cut its first half and full year 2021 sales forecasts due to disruption arising from the Covid-19 pandemic.
A2 Milk said it now expects its first half revenue to be in the order of $670m and group earnings before interest, tax, depreciation and amortisation (ebitda) margin to be around 27 per cent.
It now expects full year 2021 revenue to come to $1.40 billion to $1.55b and group ebitda margin of between 26 per cent and 29 per cent.
Shares in a2 Milk last traded at $12.18, up 29c from Wednesday's close.