Australian-US consortium in no hurry to increase bid for A2 milk

Xu Jun, Chairman China State Farms Holdings Shanghai (distributor of A2 milk products in China) and Geoff Babidge. Photo / Supplied

Australian-based Freedom Foods and US-based Dean Foods are said to be in no hurry to up their bid for A2 Milk Co after the milk marketer this week told its suitors to try again, after an initial offer wasn't compelling and drew out as yet unnamed rival bidders.

A source close to the bidding consortium said they were underwhelmed by a trading update A2 Milk released at the same time as rejecting the offer and request for due diligence, saying it contained "nothing that would shift their view on valuation".

Given Freedom Foods, the company's previous joint venture partner in Australia, has a 19.1 per cent blocking stake in A2 Milk, any rival bidders may struggle to get an offer across the line.

But the market's view seems to be it's just a matter of time before an acceptable takeover bid is nutted out and A2 Milk's share price on the NZX rebounded to 81c from 57c before the offer was announced.

Analysts covering the stock have target prices of $1 and more, and most have "buy" or "out-perform" recommendations. The level of the consortium's bid has not been revealed.

A2 Milk chief executive Geoff Babidge, who used to work for Freedom Foods, said he could only say talks were continuing.

The company, which has had patchy media coverage since its inception in 2003, is keen to spread the word about its future prospects and global expansion plans into the UK, US and China.

The board had previously indicated it would need to raise capital for that expansion, but that has since been shelved following the Freedom Foods/Dean Foods offer which was conditional on the capital raise not proceeding.

Freedom Foods is effectively controlled by the Perich family, who are major suppliers of A2 milk to the company while Dean Foods is America's largest marketer of fresh milk.

Analysts have estimated A2 Milk could need to raise $50 million to execute its US and China growth strategy but Babidge said yesterday it had sufficient capital to proceed with the current strategy.

He said due to changes made in the UK market during the 2015 financial year, a reduced funding contribution is required for that business in the 2016 financial year but it could take two years to break even.

The board expects US$20 million ($30.4 million) will be required over three years following this year's launch of the US business in California before its projected break-even point.

Babidge said A2 Milk was continuing to perform strongly, ahead of plan, with revenue projected to rise from $154 million in 2015 to $267 million in the 2016 financial year.

Infant formula, which is contract manufactured for it by Synlait Milk in New Zealand, is emerging as a significant source of revenue growth for the company.

A2 Platinum infant formula achieved revenue of $41 million in Australia and China in the 2015 financial year and the company has doubled the number of South Island farmer suppliers for infant formula in the past six months, based on forecast sales growth.

A2 Milk pays an average 6 per cent above the standard farmgate price to its suppliers in each of its regions.

It also launched retail sales of wholemilk powder in Australia last month, which are expected to be another significant revenue earner over time and will next month launch A2-branded icecream into Coles supermarkets in Australia.

Babidge said the next product in the innovation pipeline was cheese made from A2 milk.

It is also preparing a strategy for distributing milk in New Zealand once the one remaining distribution licence expires in 2017.