a2 Milk Company bids for majority stake in Mataura Valley Milk

New Zealand dairy producer a2 Milk Company (ASX: A2M) surprised the market this morning by unveiling a non-binding indicative offer to acquire a majority stake in Chinese-owned milk manufacturer Mataura Valley Milk for around NZ$270 million.

The news comes just two days since a2 Milk Company reported a net profit of almost $386 million in the last financial year, up more than 34% from the year previous.

a2 Milk Company’s move to acquire 75% of MVM followed active discussions.

Initially, a2 Milk Company intended to only share manufacturing space at MVM’s facility in Southland, New Zealand.

As a result of the discussions, a2 Milk Company made a non-binding indicative offer to acquire a 75.1% interest in MVM, for a total consideration of approximately NZ$270 million (A$241 million), based on an enterprise value of around NZ$385 million (A$344 million).

The move is likely to have been precipitated by MVM’s below-par market performance in 2019, with the company taking a $47 million loss on the calendar year.

Importantly, a formal offer allows a2 Milk Company to obtain exclusive due diligence rights – a means of looking at every detail of MVM’s books before fully committing to the acquisition.

MVM said it had agreed to provide a2 Milk Company a period of exclusivity to conduct “confirmatory due diligence” with definitive transaction documentation still to be negotiated, the company said.

Technically, a2 Milk Company could still decide to pull out of the deal without any commitments.

Multi-layered ownership

Further support for the deal came from MVM’s current majority shareholder, China Animal Husbandry Group (CAHG), which will retain a 25% interest in MVM.

The ownership structure is further thickened, given that state-linked China National Agriculture Development Group currently owns CAHG while also being the parent company of CSFA Holdings Shanghai, better known as China State Farm – currently a “strategic partner” to a2 Milk Company.

This deal is among companies with extensive existing ties – potentially indicating a brief period of due diligence before completion.

Despite a seemingly closed loop of agreement, a2 Milk Company said discussions with MVM remained “ongoing” and “incomplete”, while also describing any transaction as “potential”.

Moreover, the two dairy producers must compile definite agreements and obtain regulatory approval before a final go-ahead. Given the market stature of the two companies, regulatory approval may well be the hardest hurdle to clear.

“As previously announced, due to the increasing scale of our infant nutrition business, we have been assessing participation in manufacturing capacity and capability,” a2 Milk Company chief executive officer Geoff Babidge said.

“The potential investment in MVM’s recently commissioned facility, alongside China Animal Husbandry Group, aligns with this strategic objective as we look to complement and build upon our current strategic relationships with Synlait Milk and Fonterra Co-operative Group, which remain in place,” he added.

In a coordinated response, Synlait (ASX: SM1) put out an announcement saying it was “well-positioned to continue to support and enable a2 Milk Company’s growth aspirations via its highly integrated infant formula manufacturing capabilities that meet the high standards in China, the world’s largest infant nutrition market.”

The two companies have maintained a partnership built on an exclusive long-term infant formula supply agreement for China, New Zealand and Australia with market analysts expecting Synlait to publish full-year results for the past financial year on 28 September 2020.

According to Mr Babidge, a2 Milk Company intends to establish blending and canning capacity at MVM’s facility, as a means of funding the creation of a “fully-integrated manufacturing plant for infant nutrition”.