Bright Dairy of Shanghai will become a 65% majority shareholder of Synlait Milk when a proposed recapitalisation of the struggling dairy company is completed.
Minority shareholder and major infant formula customer a2 Milk Company will also participate in the equity raise, to maintain its 19.8% holding.
But the two large share placements have different values, as Bright is paying a premium to gain control.
Bright has agreed to pay 60c a share for about 300 million additional shares at a cost to Bright of $185 million.
A2 has agreed to pay 43c a share for around 75 million new shares at a cost of $33m.
The money raised will be used to repay $180m of retail bonds that fall due in December.
The recapitalisation process does not include equity raising from minority shareholders, whose holdings will be substantially diluted.
They will go from about 40% of issued shares to 15%.
However, their 15% portion of the new combined equity value of around $300m is greater than their 40% portion of the current $65m market capitalisation.
Therefore, tradeable Synlait shares rose 6c after the recapitalisation plan announcement, to 46c.
It has been a bumpy road for small shareholders as prolonged problems and disputes surrounding Synlait have carved about 90% out of its share price over the past two years.
The company has never paid a dividend in the 16 years since starting milk collection and processing.
It has about 275 farmer-suppliers in Canterbury and Waikato and is committed to pay no less for milk than Fonterra.
Synlait wants to lift the advance payment on its $8/kg milksolids forecast price, as farmers have asked.
Synlait chair George Adams said that two big share placements for majority owners was the most straightforward way of raising much-needed funds quickly, at a more favourable price than alternatives.
“This is critical to resetting our balance sheet and will hopefully reward all shareholders for their long-term and loyal support as we work to restore confidence in our company.”
Adams explained that minority shareholders would not have gained from a rights issue at a discount to the market price as their small shareholdings risked being diluted down to nothing.
Minority shareholders are required to approve the placements to Bright and a2 Milk, at a special meeting on September 18.
There are also constitutional changes required, for which Bright and a2 can vote, that require 75% approval.
“If the resolutions are not passed, it’s likely Synlait would need to cease trading and initiate a formal insolvency process,” Adams said.
All matters are inter-conditional, so that if one fails to gain approval, the whole process will cease.
The equity raise will only complete if it does so concurrently with the refinancing of Synlait’s bank facilities, which the company said is close to completion.
“Raising this amount of new equity capital is highly challenging in any circumstance but is particularly so for Synlait given its current over-geared financial position and recent financial underperformance.”
“Successful completion of the transactions will also provide the basis for Synlait to seek to restore farmer supplier confidence and the withdrawal of cessation notices received from farmers who have sought to terminate their milk supply agreements.”
The FY24 annual results will be announced on September 30 and earnings and profit are going to be adversely impacted by what Synlait calls a supply chain constraint in July, without going into more detail.
It is also expected to announce a decision about the future of its Pokeno manufacturing facility and the Auckland blending and canning plant.
“The strategic review does include consideration of the continued collection and processing of milk in the North Island, although no decision has been taken.”
