SML - Synlait

[Teitei]

Do you think that if Bright gets control of Synlait then it could become the biggest customer of Synlait and get the  output near cost.
 If so Would this transfer price be legal?
Does A2M already get its product cheap.
Does A2m really need Synlait in the medium term in your opinion.
I know little about Synlait.

If Bright becomes Synlait's biggest customer, I would expect Bright to get very good pricing on its products from Synlait - it's just the nature of things.

Transfer pricing - just have a look at Apple, Google and any of the multi-nationals operating in NZ - thedy pay bugger all tax on their NZ revenues as most of their profits are transferred overseas and in the case of Apple, to Ireland! I worked for a multi-national and unerringly, the management fees charged by HQ New York were always at a level to leave NZ at just above breakeven. The IRD can certainly take a case against unfair transfer pricing but have you seen any?

Dunsandel plant where A2M sources its products is profitable but not as profitable as before Covid - I assume its fortunes are tied with A2M's profitability & willingness to pay for products.

A2M is trying to diversify away from Synlait - hence the attempt to break the exclusivity agreement. In the medium term, A2M clearly prefers to be not reliant on Synlait. The arbitration result will determine that to a great extent.

As I have written before, A2M needs to be very careful it does not get offside with China Inc. China is a command economy and they can exact a horrendous cost on anyone, country or any company deemed to be a threat to China's well being (read China state owned companies). I am sure you have followed what China did to Australia's wine & lobster exports, and to Norway's salmon exports. 

As was put to me by an investment banker recently - A2M cannot do without sales to China but China can do without products from A2M.

Put it another way - I believe  most exporters would prefer to sell to other countries if they could but they can't.

[SemiStrongForm]

A2M's share price doesn't seem particularly correlated with Synlait. This leads me to believe that Synlait does not need to continue as a going concern, at least from the market's perspective.

Put another way, I disagree that:

• A2M is an eunuch, or that
• A2M's hands are tied

If you read the announcement yesterday from A2M it appeared to me that A2M are concerned about Synlait going down the current road in its current management or capital structure. To me, it read as if they want to bring this saga to a close by rejecting the loan, but such a decision would have massive consequences and could open up A2M to the wrath of their shareholders. It was ultimately less risky to approve the loan.

Open to contrary views, as always.

[Teitei]

A2M's share price doesn't seem particularly correlated with Synlait. This leads me to believe that Synlait does not need to continue as a going concern, at least from the market's perspective.

Put another way, I disagree that:

• A2M is an eunuch, or that
• A2M's hands are tied

If you read the announcement yesterday from A2M it appeared to me that A2M are concerned about Synlait going down the current road in its current management or capital structure. To me, it read as if they want to bring this saga to a close by rejecting the loan, but such a decision would have massive consequences and could open up A2M to the wrath of their shareholders. It was ultimately less risky to approve the loan.

Open to contrary views, as always.

The most telling indication of how little leverage A2M has - keeping coy about voting intention and then, voting Yes in the morning while issuing a grudging statement.

Shows A2M was not able to obtain any concessions or mlieage.

A2M's strategy is so transparent - keep coy until they know how the proxy votes were going.  If Synlait did not have enough proxy votes, SML would have had to call A2M to ask A2M to vote Yes and A2M would then, name its prize. 

Unfortunately, the other shareholders overwhelmingly voted Yes with their proxies. 

A2M did not received the call from Synlait and with no card left to play, had to vote Yes. A2M could have been the big hero by indicating it would vote yes much much earlier.

[Teitei]

Shareholders really should be turning their attention to influencing the CR terms and conditions so that it's a fair CR to all shareholders.

Forgone conclusion that the CR will be dilutary but it does not have to be unfair to other shareholders.

Remember that a shareholders' vote is required to approve the CR so there's one more hurdle Synlait has to clear before the CR goes ahead and Synlait is recapitalised.

[Clearasmud]

Shareholders really should be turning their attention to influencing the CR terms and conditions so that it's a fair CR to all shareholders.

Forgone conclusion that the CR will be dilutary but it does not have to be unfair to other shareholders.

Remember that a shareholders' vote is required to approve the CR so there's one more hurdle Synlait has to clear before the CR goes ahead and Synlait is recapitalised.

How could the CR be structured unfairly?
Bright is the natural underwriter.
Their loan to Synlait could easily have been structured to convert to equity at a favourable price,do you think they would have liked to do this?

[Teitei]

How could the CR be structured unfairly?
Bright is the natural underwriter.
Their loan to Synlait could easily have been structured to convert to equity at a favourable price,do you think they would have liked to do this?

A pro-rata issue to all shareholders would be fair.

A placement of shares followed by a retail issue would not be.

I certainly thought Bright was going to provide funding via a convertible note issue. Surprised me they didn't. Have to admit I am impressed!

[CG]

As I have written before, A2M needs to be very careful it does not get offside with China Inc. China is a command economy and they can exact a horrendous cost on anyone, country or any company deemed to be a threat to China's well being (read China state owned companies). I am sure you have followed what China did to Australia's wine & lobster exports, and to Norway's salmon exports. 

As was put to me by an investment banker recently - A2M cannot do without sales to China but China can do without products from A2M.

Put it another way - I believe  most exporters would prefer to sell to other countries if they could but they can't.

It seems like you are either forgetting or unaware who is the A2M's key Chinese partner.

"China State Farm Agribusiness has been a2 Milk's strategic distribution partner in China since 2013 and is the exclusive import agent for its China label products, including a2's China label infant milk formula.
CSFA is a wholly owned unit of China National Agriculture Development Group Co (CNADC), which is also the parent company of China Animal Husbandry Group (CAHG), which holds a 25 per cent stake in Mataura Valley Milk.
A2 Milk owns the rest of Mataura Valley."
"The extension of arrangements with China State Farm confirms the strength of our relationship with key partners in China and our shared confidence in the future," a2 Milk chief executive David Bortolussi said.
"Bortolussi said China State Farm's support would be critical for joint success in China."

Here are some insight about CNADC

China National Agricultural Development Group Co., Ltd. (hereinafter referred to as "CNADC") was founded in October 2004 upon the restructuring and merging of China National Fisheries (Group) Corporation with the China Animal Husbandry (Group) Corporation and changed its governance structure and name in January 2011 according to the Company Law. It is the only central comprehensive agricultural enterprise under the direct governance of the State-owned Assets Supervision and Administration Commission (SASAC) of the State Council. It is a leading enterprise in national animal epidemic diseases and is irreplaceable in meeting China's agricultural needs. CNADC holds 17 wholly owned or share-controlled subsidiaries, and 3 publicly listed companies. CNADC's business can be found in all provinces, autonomous regions and municipalities in China. It has established branches or bases in more than 40 countries and regions around the world and maintains economic and trade ties with over 80 countries and regions.

As a wholly state-owned company, CNADC devotes itself to international cooperation and the exploitation of agricultural and fishery resources. Domestically CNADC keeps in mind its aim to serve "agriculture, rural areas and farmers" and actively promotes the development of agricultural industrialization. After years of development, CNADC has gradually built up three core businesses: development of strategic resources, with focus on pelagic fishing and agricultural resource exploitation; research and development, manufacturing and distribution of biological vaccines, vet-medicines and feed additives; and modern seed, agricultural insurance and agricultural international trade. Meanwhile, it develops supplementary services for core businesses, such as diesel manufacturing and port construction.

CNADC adheres to the plans made by the Central Committee of the CPC and the State Council to deepen reforms in state-owned enterprises and follows the SASAC's guiding principles "to grow stronger and larger" in a bid to implement the "Twelfth Five-year Plan". CNADC will continue its efforts regarding enterprise reform, further adjust and optimize its business structure and make a more reasonable allotment of resources so as to enhance the enterprise's core competition. CNADC will cater to the domestic and international markets and strive towards more ambitious goals.

I'd say it not too bad for an eunuch to have such partner.

[Buzz]

It seems like you are either forgetting or unaware who is the A2M's key Chinese partner.

"China State Farm Agribusiness has been a2 Milk's strategic distribution partner in China since 2013 and is the exclusive import agent for its China label products, including a2's China label infant milk formula.
CSFA is a wholly owned unit of China National Agriculture Development Group Co (CNADC), which is also the parent company of China Animal Husbandry Group (CAHG), which holds a 25 per cent stake in Mataura Valley Milk.
A2 Milk owns the rest of Mataura Valley."
"The extension of arrangements with China State Farm confirms the strength of our relationship with key partners in China and our shared confidence in the future," a2 Milk chief executive David Bortolussi said.
"Bortolussi said China State Farm's support would be critical for joint success in China."

Here are some insight about CNADC

China National Agricultural Development Group Co., Ltd. (hereinafter referred to as "CNADC") was founded in October 2004 upon the restructuring and merging of China National Fisheries (Group) Corporation with the China Animal Husbandry (Group) Corporation and changed its governance structure and name in January 2011 according to the Company Law. It is the only central comprehensive agricultural enterprise under the direct governance of the State-owned Assets Supervision and Administration Commission (SASAC) of the State Council. It is a leading enterprise in national animal epidemic diseases and is irreplaceable in meeting China's agricultural needs. CNADC holds 17 wholly owned or share-controlled subsidiaries, and 3 publicly listed companies. CNADC's business can be found in all provinces, autonomous regions and municipalities in China. It has established branches or bases in more than 40 countries and regions around the world and maintains economic and trade ties with over 80 countries and regions.

As a wholly state-owned company, CNADC devotes itself to international cooperation and the exploitation of agricultural and fishery resources. Domestically CNADC keeps in mind its aim to serve "agriculture, rural areas and farmers" and actively promotes the development of agricultural industrialization. After years of development, CNADC has gradually built up three core businesses: development of strategic resources, with focus on pelagic fishing and agricultural resource exploitation; research and development, manufacturing and distribution of biological vaccines, vet-medicines and feed additives; and modern seed, agricultural insurance and agricultural international trade. Meanwhile, it develops supplementary services for core businesses, such as diesel manufacturing and port construction.

CNADC adheres to the plans made by the Central Committee of the CPC and the State Council to deepen reforms in state-owned enterprises and follows the SASAC's guiding principles "to grow stronger and larger" in a bid to implement the "Twelfth Five-year Plan". CNADC will continue its efforts regarding enterprise reform, further adjust and optimize its business structure and make a more reasonable allotment of resources so as to enhance the enterprise's core competition. CNADC will cater to the domestic and international markets and strive towards more ambitious goals.

I'd say it not too bad for an eunuch to have such partner.

I'll get in before Teitei does.

I think you're missing his point (albeit rather crudely and obliquely put), which is, exactly what you have illuminated. ATM are beholden to Bright's connections in the CCCP which so far are working very well for them both, and they are exposed to about 50% of their revenue attached to the SMAR which Synlait hold, and they're a smaller less influential shareholder.

Best maybe for ATM to not get too uppity and frustrate their most important partner to the China market, or compromise their supply to that market, from Synlait, which accounts for 50% of revenue.

A delicate balance, but so far I think they're doing OK.

[CG]

The most telling indication of how little leverage A2M has - keeping coy about voting intention and then, voting Yes in the morning while issuing a grudging statement.

Shows A2M was not able to obtain any concessions or mlieage.

A2M's strategy is so transparent - keep coy until they know how the proxy votes were going.  If Synlait did not have enough proxy votes, SML would have had to call A2M to ask A2M to vote Yes and A2M would then, name its prize. 

Unfortunately, the other shareholders overwhelmingly voted Yes with their proxies. 

A2M did not received the call from Synlait and with no card left to play, had to vote Yes. A2M could have been the big hero by indicating it would vote yes much much earlier.

There was no point for A2M to vote NO as it was quite obvious that majority will vote YES. This vote had nothing to do with obtaining concessions or to show who holds power or not, where as support for upcoming recapitalisation plan will be somewhat a different story.

[CG]

I'll get in before Teitei does.

I think you're missing his point (albeit rather crudely and obliquely put), which is, exactly what you have illuminated. ATM are beholden to Bright's connections in the CCCP which so far are working very well for them both, and they are exposed to about 50% of their revenue attached to the SMAR which Synlait hold, and they're a smaller less influential shareholder.

Best maybe for ATM to not get too uppity and frustrate their most important partner to the China market, or compromise their supply to that market, from Synlait, which accounts for 50% of revenue.

A delicate balance, but so far I think they're doing OK.

No, I don't think I'm missing Teitei's point. Why do you think "ATM are beholden to Bright's connections in the CCP" and not to CNADC's connections in CCP. CNADC tied directly to the Central Committee of the CPC and the State Council. You won't get more powerful connection than that. Also, why do you think that to get SAMR you need some special connections to CCP? There are hundreds if not thousands businesses around the world who received SAMRs and I doubt all of them got it through some sort of connections to CCP. And once again Bright is not A2M most important partner to the China market, CNADC is and exclusive one. Bright is a partner of Synlait. A2M is Synlait's customer and shareholder. But all these aside, it seems there are too much emotions and conspiracy theories around current situation. I don't think anyone wants to ruin or do harm to anybody. It's in everybody's interest to get Synlait going. All A2M wants is to remove exclusivity clause that they can expand its business and they will get what they want one way or another.

[Teitei]

No, I don't think I'm missing Teitei's point. Why do you think "ATM are beholden to Bright's connections in the CCP" and not to CNADC's connections in CCP. CNADC tied directly to the Central Committee of the CPC and the State Council. You won't get more powerful connection than that. Also, why do you think that to get SAMR you need some special connections to CCP? There are hundreds if not thousands businesses around the world who received SAMRs and I doubt all of them got it through some sort of connections to CCP. And once again Bright is not A2M most important partner to the China market, CNADC is and exclusive one. Bright is a partner of Synlait. A2M is Synlait's customer and shareholder. But all these aside, it seems there are too much emotions and conspiracy theories around current situation. I don't think anyone wants to ruin or do harm to anybody. It's in everybody's interest to get Synlait going. All A2M wants is to remove exclusivity clause that they can expand its business and they will get what they want one way or another.

Understand that China is a command economy which means that the national interest comes first when the strategy is put in place.  In this case, the national interest is securing China's food supply chain in China as well as overseas. All SOEs adhere to that strategy from central command - one for all and all for one.

A2M is taking on the central command if it takes on Bright - it's that simple. CNADC and Bright dance to the same tune.

Which is why A2M needs to tread very very carefully. And my observation is that it did not play the game well with its voting on the loan proposal. Bright has extended a friendly 'let's work together' to A2M in Synlait's and both our interests - let's hope that happens.

[BlackPeter]

Understand that China is a command economy which means that the national interest comes first when the strategy is put in place.  In this case, the national interest is securing China's food supply chain in China as well as overseas. All SOEs adhere to that strategy from central command - one for all and all for one.

A2M is taking on the central command if it takes on Bright - it's that simple. CNADC and Bright dance to the same tune.

Which is why A2M needs to tread very very carefully. And my observation is that it did not play the game well with its voting on the loan proposal. Bright has extended a friendly 'let's work together' to A2M in Synlait's and both our interests - let's hope that happens.

I guess we all get it. A2M is controlled by the Chinese and so is Synlait. They both are just puppets to please the long term desire of the CCP.

What I don't get is how in such a scenario Synlait and ATM can perform such an ugly mudwrestling match in front of everybody's eyes as they did. This is very un-Chinese and lots of people will loose their face over this episode .... and hey, even if its just a show fight, I am not seeing who gains from this spectacle? There are clearly cleaner and more efficient ways for them to get control of Synlait's facilities (actually, they used to have full control prior to SML's IPO).

While I generally agree with your conclusion - am I wondering, whether this episode might be an indication that the Chinese dragon might as well loose either its teeth or its marbles.

Pathetic board control of Synlait. Pathetic management and control of the infighting of its minions A2M and SML.

I am wondering whether its maybe not just the US slowly falling apart ...

[CG]

Understand that China is a command economy which means that the national interest comes first when the strategy is put in place.  In this case, the national interest is securing China's food supply chain in China as well as overseas. All SOEs adhere to that strategy from central command - one for all and all for one.

A2M is taking on the central command if it takes on Bright - it's that simple. CNADC and Bright dance to the same tune.

Which is why A2M needs to tread very very carefully. And my observation is that it did not play the game well with its voting on the loan proposal. Bright has extended a friendly 'let's work together' to A2M in Synlait's and both our interests - let's hope that happens.

Dear Teitei, in my previous life I had a privilege to spend quite a few years in one of those "command economy". During that time, for a couple of years, I had a chance to run my own small business while my better half at the same time was working at one of not many private banks as a top assistant to CEO. That bank later was nationalized in the name of "national interests" and top management either left country (the lucky ones) or went to prison. Now, tell me again what I need to understand about "command economy" and what is your personal experience in that field?

As for A2M, in that case they did everything right. Loan voting wasn't that important as the outcome was quite obvious. They held off to the last minute because they wanted to show that they are not happy and ready to "fight" and that was confirmed in their statement.
Regardless of anything my view is there won't be any serious confrontation and I see three possible scenarios to unfold 1) recapitalizations will be successful, Synlait will keep exclusivity rights but in this case in short to medium terms A2M will intensify it's effort to distance itself from Synlait finally cancel the contract in its current form and in the long term Synlait will probably lose A2M as customer, as a major customer anyway. 2) recapitalization will be successful, Synlait lose exclusivity rights, A2M will gradually move production to other sites to spread the risks but might keep Synlait as on of the major suppliers. 3) recapitalization won't be successful and Synlait will be taken private by Bright or some sort of JV between Bright and A2M. I think first two scenarios are more likely and have equal chances. I do not expect scenario where Synlait forced into liquidation or A2M is taking over the whole or part of it.

[Teitei]

I guess we all get it. A2M is controlled by the Chinese and so is Synlait. They both are just puppets to please the long term desire of the CCP.

What I don't get is how in such a scenario Synlait and ATM can perform such an ugly mudwrestling match in front of everybody's eyes as they did. This is very un-Chinese and lots of people will loose their face over this episode .... and hey, even if its just a show fight, I am not seeing who gains from this spectacle? There are clearly cleaner and more efficient ways for them to get control of Synlait's facilities (actually, they used to have full control prior to SML's IPO).

While I generally agree with your conclusion - am I wondering, whether this episode might be an indication that the Chinese dragon might as well loose either its teeth or its marbles.

Pathetic board control of Synlait. Pathetic management and control of the infighting of its minions A2M and SML.

I am wondering whether its maybe not just the US slowly falling apart ...

Pathetic attempt at sarcasm.

You might as well opine then that Fonterra,  all Australian wine makers & Norwegian salmon farmers are controlled by the Chinese. Because they export at the whim and fancy of the Chinese - fact.

Which part of command economy do you not get?

[Teitei]

Dear Teitei, in my previous life I had a privilege to spend quite a few years in one of those "command economy". During that time, for a couple of years, I had a chance to run my own small business while my better half at the same time was working at one of not many private banks as a top assistant to CEO. That bank later was nationalized in the name of "national interests" and top management either left country (the lucky ones) or went to prison. Now, tell me again what I need to understand about "command economy" and what is your personal experience in that field?

As for A2M, in that case they did everything right. Loan voting wasn't that important as the outcome was quite obvious. They held off to the last minute because they wanted to show that they are not happy and ready to "fight" and that was confirmed in their statement.
Regardless of anything my view is there won't be any serious confrontation and I see three possible scenarios to unfold 1) recapitalizations will be successful, Synlait will keep exclusivity rights but in this case in short to medium terms A2M will intensify it's effort to distance itself from Synlait finally cancel the contract in its current form and in the long term Synlait will probably lose A2M as customer, as a major customer anyway. 2) recapitalization will be successful, Synlait lose exclusivity rights, A2M will gradually move production to other sites to spread the risks but might keep Synlait as on of the major suppliers. 3) recapitalization won't be successful and Synlait will be taken private by Bright or some sort of JV between Bright and A2M. I think first two scenarios are more likely and have equal chances. I do not expect scenario where Synlait forced into liquidation or A2M is taking over the whole or part of it.

FYI, I have been involved in 2 companies with China partners exporting NZ produce to China. One of the companies had to close because the China government changed the regulations with no warning or explanation - our China partner which is the subsidiary of multi-billion company  accepted the decision and moved on.

And I can tell you numerous stories of how the authorities there changed regulations without consultation & with bugger all notice, and the number of times we had to twist and turn to accommodate the change in regulations. All in the name of ensuring food safety and protecting their citizens.

 Eg. Ever heard about "no wood' certification?  Even our export agent never heard of it when one of our shipments was stopped until we obtained the certification from MBIE!

So perhaps, just perhaps I may just have some relevant experience?

Round and round in circles you go.

Oh well, it's a lovely sunny day so let's all go and enjoy the day.