Synlait's new plant at Pōkeno has been a drain on the company's finances. Photo / NZME
As a make-or-break meeting of Synlait Milk shareholders fast approaches, its key backer – China’s Bright Dairy – says the company has the potential to recover.
Synlait will hold a special shareholders’ meeting on July 11 at its Dunsandel facility in Canterbury to approve a $130 million loan by Bright Dairy, Synlait’s biggest shareholder with 39.01%.
If the resolution is approved, Synlait will fully draw down the loan to meet a $130m payment due to its banks just a few days later, on July 15.
Synlait will only be able to meet that obligation if the resolution is approved by shareholders other than Bright Dairy, by way of an ordinary resolution.
That means a2 Milk – which has just under 20% – will need to approve it before anything can happen.
Behind the scenes, Synlait is working on a capital raise – the size and structure of which has yet to be determined – to repair its severely stretched balance sheet.
In an interview with the Herald, Bright Dairy’s chairman Huang Liming stressed that Synlait had Bright Dairy’s support and the company had the potential to recover.
Synlait was Bright Dairy’s first overseas investment when it took a controlling stake 14 years ago.
Through an interpreter, Huang said Bright’s investment in Synlait was strategic.
“Our commitment to Synlait is really from a strategic perspective and also from a China-New Zealand agriculture perspective,” Huang said.
Synlait’s main problem is that while its Dunsandel complex is profitable, as is its investment in Dairyworks, its near-new $400m state-of-the-art nutrition facility at Pōkeno is under-used and has never paid its way.
“When we look back, right before Covid-19, as a strategic investor we were quite comfortable with Synlait’s performance,” Huang said.
“Before Covid, we went through this long period of prosperity. We were impressed with the high rate of growth from Synlait before Covid because it had evolved from being a single ingredients plant, before developing into an advanced nutrition plant at a high pace.
“We are very comfortable and proud of our investment in Synlait.
“Covid has had an impact on a lot of business globally, so although we have been in this turbulent period, there is a combination of macro and micro reasons.
“As we are recovering in China, we think Synlait does have the potential to recover.”
Huang said China and Asian markets are recovering, so Synlait’s position in advanced nutrition manufacturing and food service meant it was well-placed for the future.
He added China remained New Zealand’s biggest export destination for dairy products and that that was unlikely to change.
“Bright is a long-term investor, especially as we deal in the primary sector.
“We all know that the sector does not always make money.
“When you invest in this sector, you have to take a very long-term view commitment.
“Bright has been with Synlait for 14 years and, frankly speaking, we have not received a dividend.
“We are like a sovereign investor – we really look at the long term.”
Bright Dairy is part of Bright Food, China’s third-largest food group and a key food supplier for Shanghai’s 25 million population.
Shanghai Maling – also part of Bright Food – formed a transformative joint venture with Silver Fern Farms – New Zealand’s biggest meat exporter – in 2016.
Aside from next month’s vote, Synlait still faces financial challenges, among them being the $180m of NZX-listed bonds that fall due in December.
“We understand that Synlait is in a delicate situation, mainly due to the requirement for recapitalisation and deleveraging,” Huang said.
“Synlait made the decision to invest in Pōkeno before Covid and at the time we were seeing very high growth rates in consumer orders.
“But after this investment was made, we do realise that Pōkeno has an under-utilisation issue.”
The New Zealand market in general faced challenges, Huang said.
“You have a high inflation and high interest rates here – these are the two macro factors that have contributed to the current situation.
“For Bright Dairy, we have more than 112 years of history but in China, we are not unfamiliar with these economic cycles and Synlait is a relatively young company.”
Bright views Pōkeno as a quality asset, given its ability to make advanced dairy and plant-based products.
“Bright Dairy has its own infant nutrition strategy and that’s one of the reasons why we are steadfast behind Synlait, because we see huge potential.”
Huang said Bright and a2 Milk – which derives all its infant milk formula from Synlait – “exchange views on critical matters, from time to time, and in a friendly and co-operative way”.
Separately, a2 and Synlait are in dispute over exclusive manufacturing supply rights.
The matter has gone to arbitration.
Huang said that both a2 and Bright Food want Synlait to stabilise.
“Without Synlait, there would not be prosperity for a2 Milk.
“From our own perspective, Synlait and a2 should be like brothers and sisters.
“After we have settled these current and near-term issues, like deleveraging and the business relationship, we want Synlait to come back and focus on its core competitive advantages – its advanced nutrition capability as well as its newly-developed food service segment.”
Bright Dairy, as a shareholder but also as a key player in the dairy industry in China, is looking at enhancing its synergies with Synlait going forward.
As July’s vote approaches, Synlait’s share price has continued to take a hammering.
The stock last traded at just 22.5c, having dropped by 86% over the last 12 months.
Synlait, in its notice of meeting, said if the $130m payment is not made and the banks do not agree to alternative arrangements, the board believed the company would need to cease trading or initiate a formal insolvency process.
A2 Milk has not determined how it will vote on the resolution, although it is communicating with Synlait.
Julia Zhu, a Bright Dairy-appointed director on the Synlait board, said the $130m loan facility is one part of Bright’s wider support to see Synlait return to a much stronger financial and operating position as early as practicable in this economic cycle.
“We are deeply committed to Synlait, believing its assets and operations to offer significant value and opportunity within regional and global dairy markets,” Zhu said.
While in theory insolvency is possible for Synlait, one industry source said that’s not going to happen.
“This is not heading into an insolvency situation,” he said. “I think that is highly unlikely.”
In April, the cash-strapped dairy company won an extension for a $130m debt repayment after asset impairments plunged the company into a $96.2m loss for the first half to January 31.
Chief executive Grant Watson said at the time: “After a significant level of investment over a number of years, Synlait has far too much capacity and too much debt.”
George Adams took over as chairman of the troubled group on May 1 after a slew of changes at a management and directorship level and a string of earnings downgrades.
For the time being, Synlait has been thrown a lifeline by Bright Dairy.
It won’t be the first time that a Chinese food group has come to the aid of a New Zealand food producer.
In 2010, Bright Dairy agreed to buy a majority stake in Synlait Milk after the company had abandoned a planned $150m share sale in the previous year, due to a tepid response from local investors. Bright’s 51% holding was later diluted to 39% after a public share offer.
In 2012, Chinese interests emerged as major players in the New Zealand dairy industry when Shanghai Pengxin took control of the failed Crafar Farms in the North Island. The resulting entities, Theland Farm Group and Milk New Zealand, are now among New Zealand’s biggest dairy producers.
In 2016, a cash-strapped Silver Fern Farms – the country’s biggest meat processor – received a much-needed $267m cash injection from Shanghai Maling, also part of the giant Bright Food Group.
In 2019, Chinese food group Yili bought the debt-laden Westland Milk – then New Zealand’s second-biggest dairy co-op – for $588m.
At the time, Yili said Westland Milk would form part of its “dairy silk road”.
Jamie Gray is an Auckland-based journalist, covering the financial markets and the primary sector. He joined the Herald in 2011.
Japanese food group Meiji is listed on the Nikkei 225.