An insider trading investigation into A2 Milk Co suitor, US-based Dean Foods, is understood to have scuppered its involvement with Australian-based Freedom Foods in a potential takeover of the specialty milk marketer.

Dean and Freedom Foods, which is a major supplier to A2, put forward an expression of interest in A2 in June, although the offer amount was undisclosed. The A2 Milk board replied last month that it wasn't compelling enough and talks since have stalled.

Australian sources suggest the transaction is now off the table with Dean Foods distracted by an insider trading investigation launched by US federal authorities.

The Wall St Journal has reported both criminal and civil authorities are investigating whether the former chairman of Dean Foods, Tom Davis, leaked inside information about a corporate spin-off to professional gambler, William T Walters, who in turn, is suspected of tipping off championship golfer Phil Mickelson.

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The food and beverage company has been subpoenaed to provide documents after reports the investigation centres on the company's spin-off of a WhiteWave Foods subsidiary in August 2012.

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Davis, who had been a Dean Foods board member since 2001, resigned earlier this month.

A2 Milk's shares have headed south again in early trading on the NZX this morning - down 4.2 percent to 69 cents, having dropped 6.6 percent yesterday in trading on the ASX, where the stock closed at 64 Australian cents. That's after the company said there had been no further contact between the parties since it rejected the offer and a spokesman said today it had no knowledge of whether Dean Foods has pulled out of the talks.

A spokeswoman for Freedom, which has a near 20 percent blocking stake in A2 Milk, declined to comment on the potential takeover.

It is understood Freedom, which is controlled by the Perich family, doesn't want to finance such a move on its own.

Freedom's management are said to be unhappy with A2's financial performance, describing a recent trading update A2 Milk released in July when rejecting the offer as "underwhelming" and that it "contained nothing that would shift their view on valuation".
It's believed Freedom is concerned about A2's ability to fund its global expansion plans without the support of deep-pocketed partners.

A2 Milk reported a full-year loss of $2 million yesterday, mainly due to the $1.7 million cost for ASX listing, which has added another 1800 shareholders and taken Australian owners, including Freedom at 20 percent, to 38 percent of the register. Cash flow is down to $6 million from nearly $16 million a year ago but managing director Geoff Babidge said existing international expansion can be funded from expected earnings growth this year. The board halted plans for a further capital raising when the expression of interest was made.

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A2's revenue lifted 40 percent to $155 million in the 12 months to June 30, following strong demand for its A2 Platinum infant formula sold in Australia, New Zealand, and China. Infant formula now accounts for 27 percent of revenue, a 445 percent increase on the 2014 financial year.

Analysts have expressed concern Australian fresh milk sales have flattened in the latest result, with its share of the white milk market grocery trade only lifting to 9.3 percent from 9 percent the previous year.

A2 Milk forecast strong growth in revenue and operating earnings in the 2016 financial year, assuming continued demand for infant formula which it's looking at expanding to the UK and potentially other Asian countries. Revenue is forecast to rise to $267 million and earnings before interest tax depreciation and amortisation to $12 million in the 2016 financial year.