Synlait is in the final stages of refinancing its bank facilities.
The plans will require approval from a special meeting of shareholders to be held on September 18.
The capital raise will be by way of a $185m issue of shares to Bright Dairy at 60c a share.
A $32.8m issue of shares to a2 Milk at 43c a share.
Synlait Milk’s long-awaited $217.8 million recapitalisation plan will see China’s Bright Dairy take an outright majority in the troubled dairy processer.
The capital raise represents around three times Synlait’s current market capitalisation of $86m and will largely deal with $180m of retail bonds that fall due in December.
If approved, Bright’s holding will go from 39.01% to 65% while a2 Milk’s stake will remain at 19.8%.
“If the resolutions are not passed, it’s likely Synlait would need to cease trading and initiate a formal insolvency process,” he said.
Adams said Synlait was grateful for the continued support of the two major shareholders.
The capital raise is contingent on a number of elements.
It will only be completed if it does so concurrently with the refinancing of Synlait’s bank facilities.
Crucially, Synlait and a2 Milk - its main customer for infant formula - agreed to settle their contract differences last week.
“The equity raise, the settlement with a2 Milk and the bank refinancing are inter-conditional and therefore must all be approved and occur contemporaneously (or substantially contemporaneously) with each other, or not at all,” Synlait said.
Completion of all three components is expected on October 1.
If either resolution for the respective placements does not pass, the placements, the settlement with a2 Milk and the bank refinancing would not complete and Synlait would be unable to repay debt and reset its balance sheet.
“In this situation, Synlait would likely need to cease trading and initiate a formal insolvency process unless it were to become clear that further support would be forthcoming from its existing banks,” the company said.
“Further, even if the board were to form the view in these circumstances that Synlait could continue trading, the existing banks may seek to initiate a formal insolvency process, such as appointing a receiver, were Synlait to default on its obligations to those banks.”
All tranches of the existing bank facilities (other than one tranche with a limit of about $62m) are due to mature on October 1 and all amounts outstanding under those tranches must be repaid by Synlait on or before that date if not refinanced.
“Raising that amount of new equity capital is highly challenging in any circumstance, but is particularly so for Synlait given its current over-geared financial position and recent financial underperformance,” Adams said.
Bright Dairy has already thrown Synlait a lifeline in the form of a $130m loan.
Adams said the equity raise structure provided the greatest certainty of reducing Synlait’s debt in the shortest timeframe.
Synlait chairman George Adams.
“This is critical to resetting our balance sheet and will hopefully reward all shareholders for their long-term and loyal support as we work to restore confidence in our company.”
The independent directors unanimously recommended shareholders vote in favour of the ordinary resolutions relating to each of Bright Dairy and a2 Milk.
Bright Dairy-appointed director to the Synlait board, Julia Zhu, said Bright remained confident about the long-term prospects for Synlait in the global nutrition market.
“We first invested in Synlait almost 15 years ago and our decision to invest at this critical juncture reflects our long-term commitment to Synlait, its shareholders, employees, customers and suppliers,” she said.
In an independent report, Northington Partners concluded the deal was in the best interests of existing Synlait shareholders.
On the question of Synlait’s $180m of retail bonds, which fall due in December, the company said it planned to redeem the bonds at $1 per bond, plus accrued interest.
Adams told the Herald the plan had its challenges, given it seeks to raise more money than the company’s market cap.
The two-tier nature of the deal recognises the control it would afford to Bright Dairy.
On minority shareholders missing out, Adams said a retail shareholder with $10,000 worth of shares would be on the hook for $37,000 if the recapitalisation was via a rights issue.
“By our estimates, most of them would struggle with that,” Adams said, adding a deeply discounted rights issue would have “slaughtered” the already weak share price.
“Come October, my hope is that shareholders will see the value of this, and that we will have a very secure future for our shareholders, staff and our farmer suppliers,” he said.
Synlait has its Pōkeno facility “under review”.
“We have many thoughts on Pōkeno, and we will make an announcement within the next four to six weeks about what’s going to happen on that front,” he said.
“We are confident that we will get a good outcome that will make sense for the business,” he said.
Adams said a successful shareholder vote will allow Synlait to deleverage.
“Then we can put this behind us and refocus, and rebuild a really strong business for the future.”
“The interesting thing about this [plan] is that it either it all works, or none of it works.
“In reality, the future of the business is once again in the hands of the shareholders,” he said.
Synlait’s independent directors have indicated their full support for the plan.
Adams said without it, Synlait would likely enter receivership.
Craigs Investment Partners said the “key value upside” for Synlait would be if it were able to sell Pōkeno at 50-75% of its book value, which would add $0.31-0.47 per share to its valuation, enabling Synlait to repay Bright’s two-year $130m shareholder loan while complying with bank covenants.
Jamie Gray is an Auckland-based journalist, covering the financial markets and the primary sector. He joined the Herald in 2011.
