Could a purchase of some of China’s New Zealand dairy assets be on the cards for a2 milk?
The company, which at last count had nearly $1 billion in the bank, has in the past expressed an interest in acquisitions.
Last week, the dual-listed infant formula marketer went into a trading halt after the ASX queried what had been an explosive performance of its share price, which was up 11% in one session.
In its response, a2 Milk said the spike was most likely a reaction to China’s stimulus package - outlined last week - which so far has drawn a positive response from the capital markets.
The Chinese government’s package specified that households with two or more children would be offered 800 yuan ($181) a month per child, excluding the first child, which may arrest the decline in the country’s birth rate.
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In response to the stimulative measures, China’s A300 Consumer Staples index was up 27% over the week, with the share prices of companies operating in the dairy and nutrition sector increasing significantly over the same period, such as Ausnutria, Bright Dairy, Feihe, H&H, Mengniu and Yili which increased in the range of 13% to 35%.
“Given a2 Milk’s exposure to Chinese consumer demand, a2 Milk considers this to be the most likely explanation for the increase in its share price last week,” a2 Milk said.
But it added: “For completeness, consistent with its publicly announced strategy which includes developing infant milk formula manufacturing capability and increasing China market access, a2 Milk is currently in discussions regarding the potential acquisition of a manufacturing facility.
“The discussions are incomplete with no binding terms agreed, due diligence not yet completed and there is no certainty a transaction will occur. As such there is no further meaningful information to disclose at this stage.”
Forsyth Barr analyst Matt Montgomerie said the most obvious options in New Zealand were assets currently operated by China’s Yashili NZ and Oceania Dairy.
In 2021, a2 Milk completed the acquisition of a 75 per cent interest in Southland dairy nutrition company Mataura Valley Milk from China Animal Husbandry Group (CAHG), which retained a 25% interest.
Oceania Dairy's Glenavy plant. Photo / NZME
Most of a2 Milk’s formula is made by Synlait Milk, in which it has a near 20% stake. China’s Bright Dairy owns 65%.
China is a2 Milk’s biggest market and the company ranks in the top five in terms in terms of sales of infant formula in the PRC.
Montgomerie noted that a2 Milk had in the past mentioned New Zealand processing, blending and canning as possibilities.
“We have assessed the range of options in New Zealand, and conclude that the likely options are Yashili NZ or Oceania Dairy [albeit we are unsure if either are willing sellers],” Montgomerie said.
“The key risks are a2 Milk’s limited manufacturing experience, and access to milk supply [particularly in the case of Yashili].
“Overall, we think if a transaction is made at a reasonable price, it would be a positive outcome: (1) reducing supply chain risks [mainly regulatory], (2) capture manufacturing margin over the long-term, (3) possibly improve near-term earnings [while interest income would decline, if a good acquisition is made, ATM will have significant manufacturing capacity], and (4) open up capital return opportunities.
“A2 Milk has flagged China, and blending and canning, investment only in the past, but we think a fully integrated site acquisition in NZ would be preferred.”
If a successful acquisition was made, it would open up other options for a2 Milk.
“A transaction would: (1) open the path to capital returns over the medium term, (2) capture manufacturing margin [English and new Chinese label products], and (3) improve a2 Milk’s market share capture ability through new products,” he said.
Yashili - which has had a presence in New Zealand since 2012 - has facilities at Pokeno, close to Synlait’s factory.
Oceania Dairy has plant at Glenavy, in South Canterbury, and is a wholly-owned subsidiary of Inner Mongolia Yili Industrial Group (Yili) - China’s largest dairy producer.
The state-of-the-art Glenavy processing plant produces milk powder for export to China, where it is used by Yili to make infant formula.
Shares in a2 Milk last traded at $6.81, down 4c.
Sir John Key’s US lawsuit moves forward
A US judge has consolidated two civil lawsuits targeting executives and directors of US tech giant Palo Alto, including former Prime Minister Sir John Key.
The case has now been put on hold until the outcome of a third, similar case is resolved. Two separate plaintiffs, Nathan Silva and Kenneth Blevins, filed shareholder derivate action in April and May respectively.
They allege Palo Alto executives and directors misled investors about the prospects of the company’s products and services and growth expectations. It has also been reported that the plaintiffs have alleged directors and managers sold off a large number of shares, which the lawsuits allege amounts to insider trading.
When news broke of the shareholder lawsuits in May, Key said in a statement there was “no merit” to the lawsuits naming him.
“Along with the other directors of Palo Alto Networks I have been named in a series of copycat lawsuits brought by three shareholders based on unproven allegations against the company in relation to our second-quarter earnings update.
“Such lawsuits are not uncommon in the United States hence why this action has received very little media coverage offshore.
“In my view there is no merit to any of the claims. Palo Alto Networks has very strict share trading policies for its senior management and directors inline with SEC guidelines.
“At all times I have followed these rules. As this matter may well be before the courts I will not be making any further comments.”
In August, US senior district judge Charles Breyer issued an order to consolidate the two plaintiffs’ cases.
This month, he issued a further order to temporarily stay the derivative action pending final resolution of a third separate shareholder claim, brought by Ron and Michele Nabhan against Palo Alto and three individuals, not including Key.
The defendants in the third claim intend to pursue a motion to dismiss, “the outcome of which will be informative to the litigation of the consolidated derivative action”, Judge Breyer said.
The Nabhans have until October 11 to file any amended complaint with the defendants given until December 10 to respond. In terms of any motion to dismiss the claim, opposition must be filed by January 24.
Thames Water’s credibility is disappearing with its cash
If you are standing on a blazing platform, it is best to know how fast it is burning. Thames Water, however, last week warned it could run out of cash at the end of December. Just over two months ago, it had forecast adequate liquidity to survive until next May.
How has the indebted utility, battling to avoid renationalisation, mislaid five months of liquidity? The simplest answer is that Thames Water is burning through cash faster than expected, even since July. This calls into question management’s credibility. Some costs, such as suppliers demanding stricter terms, are out of their control. Others, including putting more cash into reserves under the terms of its complex financing structure, should have been foreseen. Certainly, it is less than ideal when seeking new investors to stump up £3.25 billion for a turnaround.
Another answer — and Thames Water’s preferred one — is that it still does technically have liquidity until May 2025.
It needs a majority of creditors to allow it to draw on £380 million of emergency cash held in reserves. It would also need access to £420m of undrawn facilities, or it will run out of cash at the end of December. It would then enter “standstill” (in other words, default). As well as allowing it to access the £380m of emergency cash without permission, another £550m in liquidity reserve facilities would become available. Capital expenditure, however, would be restricted to essential maintenance.
It strains credibility (again) to suggest nothing has changed. Credit rating agencies are rattled by the disclosure of those conditions. Moody’s and S&P have cut their ratings deeper into junk territory. S&P’s simultaneous downgrade of Thames Water’s management and governance from “moderately negative” to “negative” speaks volumes. (Thames Water insists it was “very clear” that its liquidity position was dependent on both cash and undrawn facilities.)
The chances of Thames Water avoiding temporary renationalisation rest on finding new equity investors — a process that unsurprisingly prompts investor scepticism. Or it could rely on creditors. One possible solution, being examined by a group of 90 creditors holding £9b of Thames Water’s debt, could involve an interim lending facility to tide over Britain’s biggest privatised water utility.
The creditor route looks most plausible. This would surely please regulator Ofwat, which wants creditors to agree a restructuring that would make it easier to raise equity.
It remains unclear, though, why creditors would put up interim finance until they know that Thames Water’s regulatory settlement, which determines allowable returns over five years from April, will be enough to attract new investors.
On the current timetable, that outcome will be published on December 19, and could be pushed into January. Thames Water’s hopes of avoiding renationalisation are — like its cash balances — disappearing fast. - Lex, Financial Times
- Jamie Gray is an Auckland-based journalist, covering the financial markets and the primary sector. He joined the Herald in 2011.
