Bright Dairy Takes Control of Synlait Milk in Crucial Recapitalisation Effort

This move comes at a critical time for Synlait, which has faced prolonged financial difficulties and a substantial decline in its share price.

Bright Dairy, already a key player in Synlait’s operations, will secure its controlling stake by purchasing approximately 300 million additional shares at a premium price of 60 cents per share, amounting to a total investment of $185 million. This acquisition positions Bright Dairy as the dominant force in Synlait's future, as it moves to stabilize the company's finances and operations.

In addition to Bright Dairy, the a2 Milk Company, a minority shareholder and major customer, will also participate in the equity raise to maintain its 19.8% stake in Synlait. However, a2 Milk will pay a lower price of 43 cents per share for around 75 million new shares, contributing $33 million to the recapitalisation effort.

The funds raised through this recapitalisation will primarily be used to repay $180 million in retail bonds due in December, addressing immediate financial obligations. However, this process will significantly dilute the holdings of minority shareholders, whose ownership will drop from approximately 40% to 15% of issued shares. Despite this dilution, the value of their shares is expected to increase, given the new combined equity value of around $300 million, compared to the current $65 million market capitalisation.

The announcement of the recapitalisation plan has already had a positive effect on Synlait's share price, which rose by 6 cents to 46 cents following the news. This development offers a glimmer of hope for small shareholders who have seen the company's share price plummet by about 90% over the past two years due to ongoing challenges and disputes.

Synlait's chairman, George Adams, described the dual share placements to Bright Dairy and a2 Milk as the most straightforward and effective way to quickly raise the necessary funds at a favorable price. He emphasized that this approach was critical to resetting the company's balance sheet and restoring confidence among shareholders. Adams also explained that alternative fundraising options, such as a rights issue at a discount, would have further diluted minority shareholders' stakes, potentially reducing their holdings to negligible levels.

The proposed recapitalisation plan, including the share placements to Bright Dairy and a2 Milk, requires approval from minority shareholders at a special meeting scheduled for September 18. Additionally, constitutional changes that require 75% approval will also be put to a vote. Failure to secure approval for these resolutions could lead to the cessation of Synlait's operations and the initiation of a formal insolvency process, making this vote crucial for the company's future.

The successful completion of the recapitalisation and concurrent refinancing of Synlait's bank facilities, which is nearing finalization, will be essential for stabilizing the company's financial position. This capital infusion is also expected to help restore confidence among Synlait's farmer suppliers, some of whom have recently issued cessation notices seeking to terminate their milk supply agreements.

Synlait’s FY24 annual results, scheduled for release on September 30, are anticipated to reflect the challenges the company has faced, including a supply chain constraint in July that is expected to negatively impact earnings and profit. The company is also expected to announce decisions regarding the future of its North Island assets, including the Pokeno manufacturing facility and the Auckland blending and canning plant, as part of its ongoing strategic review.