a2MC provides notice of cancellation of Synlait’s exclusive supply rights. Supply Agreement otherwise continues
The a2 Milk Company (a2MC) has decided to end the exclusive agreement it had with Synlait Milk Limited (Synlait) for making and supplying certain baby formula products. These exclusive rights covered the production of stages 1 to 3 of a2MC’s infant milk formula (IMF) products, like a2 Platinum®, for sale in China, Australia, and New Zealand. However, stage 4 IMF and other a2MC products were not part of this exclusivity.
The reason for ending this exclusivity is that Synlait did not meet the agreed-upon delivery performance standards during the financial year 2023, especially in relation to products with English labels. Despite ending exclusivity, Synlait will still be an important supplier to a2MC, and the existing supply agreement terms, including pricing, will continue to apply.
The supply agreement between a2MC and Synlait will stay in place, and either party can terminate it with three years’ notice. a2MC believes Synlait is still obligated to supply a certain volume of IMF per year, including all stages of their current English label product and the new Chinese label product, a2 至初®.
If Synlait disagrees with this decision, they will try to resolve the issue through negotiations and, if needed, confidential arbitration. During this process, a2MC has agreed to keep Synlait’s exclusivity in place until the matter is resolved, by the end of 2024.
In case the exclusivity is lifted, a2MC may choose to produce a2 Platinum® at other facilities, like Mataura Valley Milk (MVM), which they partly own. However, any changes are not expected to significantly impact their operations in the near term.
Overall, a2MC is taking these steps due to the unprofitable Mataura Valley Milk (MVM) processing plant which they own and concerns over Synlait’s performance.
The market opened to news with A2 milks shares down 1%. Synlait was initially placed in a trading halt pending an update from the company. Their shares fell 9.38% on the day after the halt was lifted. Further to their announcement, Synlait reconfirmed their guidance within the range of a loss of $5 million to a profit of $5 million, as previously announced. Synlait has also successfully completed it planned bank facility refinancing.
Material concerns remain over Synlait’s retail debt. The SML010 bond is now trading at a yield to maturity of 16.70%. The $180 million dollar retail bond is due to be repaid in December 2024. The company is in the process of selling assets to avoid having to raise capital to resolve their balance sheet issues. Investors who hold these bonds may wish to talk to their adviser to see if they remain appropriate for their circumstances.
Synlait is down 64.87% year to date at $1.24 per share. A2 is now $4.63 per share down 37.36% year to date, having risen 24% the year before.
Two-year common base chart. A2 Milk in the black and Synlait in red.