China’s Bright Dairy Poised to Take Majority Control of Synlait Amid Recapitalization Effort

Under the terms of the proposed deal, China's Bright Dairy, which currently holds a 39% stake in Synlait, stands to increase its ownership to nearly two-thirds of the company, positioning it as the majority stakeholder. Meanwhile, The a2 Milk Company (a2MC) will maintain its 19.83% share in the company, demonstrating ongoing confidence in Synlait's prospects. The capital raised from this equity injection will be primarily allocated to debt reduction.

The recapitalization plan is contingent upon shareholder approval, with a pivotal meeting scheduled for September 18 at Synlait's Dunsandel factory. The successful completion of the equity raise is also tied to the concurrent refinancing of Synlait’s bank facilities, along with the recent settlement of a dispute with a2MC. All three components are interdependent, meaning they must be approved and executed simultaneously to avert a potential collapse of the deal.

Synlait's Chairman, George Adams, emphasized the critical nature of the equity raise, describing it as essential to the company's survival. "After a thorough evaluation process, including independent expert advice, we have determined that this recapitalization is the most viable option given our current challenges," Adams stated. He warned that failure to secure shareholder approval could force Synlait into insolvency proceedings. Adams expressed deep gratitude for the unwavering support from both Bright Dairy and a2MC, underscoring their commitment to Synlait’s recovery.

Shareholders are being asked to approve two key resolutions:

A $185 million share issue to Bright Dairy Holding at an issue price of $0.60 per share. This represents a 100% premium over Synlait's closing share price on the NZX Main Board as of August 15, 2024. Upon completion, Bright Dairy’s ownership would rise from 39.01% to 65.25%, solidifying its control over Synlait.

A $32.8 million share issue to The a2 Milk Company at an issue price of $0.43 per share, reflecting a 43% premium over the same closing share price. a2MC’s stake will remain at 19.83%, further cementing its strategic partnership with Synlait.

Synlait has cautioned that if either of these resolutions fails to pass, the entire recapitalization effort, including the bank refinancing and the settlement with a2MC, would be jeopardized. This would likely lead to an inability to service its debt obligations, potentially resulting in the company ceasing operations and entering formal insolvency.

Despite the high stakes, both Bright Dairy and a2MC have publicly endorsed the recapitalization plan, signaling strong institutional backing. Adams also acknowledged the crucial support from retail shareholders, particularly in approving a recent $130 million shareholder loan. However, he noted that the current equity raise structure offers the most certainty in reducing debt swiftly and at a favorable price, which is vital for restoring Synlait’s financial health and rebuilding shareholder confidence.

As Synlait moves towards this critical juncture, the outcome of the upcoming shareholders' meeting will be pivotal in determining the company’s future trajectory, with the potential for Bright Dairy to take commanding control and lead the company's turnaround efforts.