The association said the long-awaited capital raise – which involves the two biggest shareholders Bright Dairy and a2 Milkpumping in $217 million – represents an effective end-game for the future of Synlait as a listed investment opportunity for shareholders.
“There is no doubt that a capital raise is required, as part of a wider restructure of a balance sheet that is punch-drunk from the impacts of poor investment decisions, debt funding and less-than-stellar operating performance,” NZSA chief executive Oliver Mander said in a report.
“And therein lies the issue – the balance sheet is so stressed that the Synlait board has deemed that there is no room for retail shareholders in Synlait’s financial resurrection.”
China’s Bright Dairy will subscribe for $308m shares at $0.60 per share, for a total of $185m, while a2 Milk will pay $0.42 per share for 76.2m shares, for a total of $32.8m.
A2 Milk will end up retaining its current shareholding (19.8%), while Bright Dairy’s ownership will increase from 39% to 65.25%.
The two companies will control around 85% of Synlait’s voting capital, with retail shareholders’ share declining from around 41% to 15%.
Shares in Synlait last traded at 40c – down 71% over the last 12 months – but have been improving since hitting 28c just before the plan was announced on August 20.
Mander said it was a “dead rat” for minority shareholders.
“It’s an unholy trade-off: while the value of Synlait is likely to improve as a result of these placements, the level of dilution is at such a level where minorities are irrelevant to the conversation.
“Minorities will receive better value, compared to the current position, on their existing holding, but are essentially ‘locked out’ of the future upside associated with the new capital – that will accrue only to Bright and a2 Milk.
Most of the cash infusion will be used to pay off $180m of Synlait bonds, which fall due in December.
New Zealand Shareholders Association CEO Oliver Mander. Photo / NZME
Synlait’s shares have been under the pump over the last few years, due in part to the impact that Covid-19 had on the lucrative “daigou” trade in infant formula, a slowdown in China’s birth rate, and the failure of its new plant at Pōkeno to attract sufficient custom.
Mander said the dramatic slump in Synlait’s share price and the sheer scale of its debt mountain were likely to have been the telling factors in the decision of the Synlait board to not extend the capital raise option to retail shareholders.
”There are at least two root causes for the company’s woes: an ill-judged decision to invest hundreds of millions in creating a new plant at Pōkeno, coupled with a further investment to upgrade said plant a couple of years later, and the longer-term impact of the company’s unique governance structure, with the company listed under an NZX waiver allowing Bright Dairy to have 50% of the directors on the board, despite only holding a 39% shareholding.”
Synlait chair George Adams. Photo / NZME
Mander said the NZSA has had conversations with Synlait over the years.
“A telling factor in our discussions is who we have been talking with – there has been a revolving door of chairs and directors during that period.
“The lack of stability in Synlait’s boardroom is a likely factor, faced with a constant Bright Dairy shareholding presence, is likely to have been an unconscious contributor to weakening the standing of minority shareholders.”
Mander said chair George Adams had limited cards to work with since his appointment – “all drawn from a deck stacked against him and minority shareholders”.
“In this context, NZSA believes that he has shown admirable leadership and an ability to execute to rescue the company, even if the resulting capital raise is at the expense of full exclusion of retail shareholders in future upside.”
When the deal was announced, Adams acknowledged to the Herald that minorities would miss out.
But he said retail shareholders with, say, $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.
The NZSA has been vocal when it comes to “controlling shareholders” of NZX-listed companies. Around a third of the companies on the exchange have a shareholder with a 30% or more shareholding – easily enough to control outcomes.
“The Synlait situation should ram home to investors the potential risk they face when investing in such companies”.
Synlait, with Bright’s 39% holding, was already on this “controlled” list.
Mander pointed out that Bright Dairy had been a steadfast supporter of Synlait over the years.
As recently as July, it provided a $130m shareholder loan to Synlait, as a means of the company beginning its complicated journey to financial resurrection.
“In this situation, however, we can’t help noting that a 65% ownership position for Bright Dairy seems to extend well beyond the 50% threshold generally accepted as ‘control’,” he said.
The NZSA would be “highly supportive” of a public commitment by Bright to sell down that incremental 15% to the local market within, say, three years.
“Such an arrangement would provide liquidity, restore minority shareholder interest to 30% and allow Bright to recoup some of the significant investment it has made into Synlait – all while retaining that all-important control.”
Jamie Gray is an Auckland-based journalist, covering the financial markets and the primary sector. He joined the Herald in 2011.
