SML - Synlait

[BlackPeter]

In an earlier post back in February I ran some number on A2 buying SML at a premium on the share price at the time.

But let's revisit the idea.

At today's current SP of $0.67 SML is worth $146.450m To keep it simple let's call A2's holding worth 20% or $29.29m

Based on the lastest news I don't think there is any reason at all to justify an offer at a premium.

So lets say A2 offers $0.67 to existing shareholders. A2 would need to stump up with $117.160m

A2's current cash on hand sits at $792m. So buying SML, A2 would deplete this to $674.84m.

And realistically A2 would need to keep the bankers happy and chuck them $130m. So this would leave A2 with $544.84m cash on hand.

Now lets say they need to keep Bright happy. They could offer Pokeno lock stock and barrel for $100m. A2 now has $644.84m cash

And say A2 can flog off Dairy works for $80m. Now gives them $724.84m cash on hand

So for essentially $67.16m A2 buys Dunsandel, SAMR license, Production at zero margin and Canning / blending facilities (something they have earmarked $120m for at Mataura)

Of course they have to do something with the $180m worth of bonds. But even if they pay these back without a further bond issue A2 is still left with $544 in the bank

Convince me this isn't a cunning plan! (oh and while I have written this SP has dropped back to $0.65. Be in quick for this once in a life time offer)

I guess what surprises me is that you see the muppets at ATM in a key position to do anything with SML. They are not (other than potentially as useful idiots for the Chinese).

The largest shareholder is Bright Dairy with 43% and they even have an agreement with NZX that this allows them to control the board (as they do).

They won't care a jota about the interests of ATM  or the interests of any other share- or bondholder. Bright Dairy will clarify what's in the best interest of the CCP, and this is going to happen.

I doubt that ATM will play any outstanding role in this process.

[Minimoke]

I guess what surprises me is that you see the muppets at ATM in a key position to do anything with SML. They are not (other than potentially as useful idiots for the Chinese).

The largest shareholder is Bright Dairy with 43% and they even have an agreement with NZX that this allows them to control the board (as they do).

They won't care a jota about the interests of ATM  or the interests of any other share- or bondholder. Bright Dairy will clarify what's in the best interest of the CCP, and this is going to happen.

I doubt that ATM will play any outstanding role in this process.

I think it odd Brights interest given so little seems to be produced for them. A2 is essentially Dunsandles only customer.

[Minimoke]

The fly in the ointment is that ATM and SML management stopped talking some time back and only talk through their lawyers now.

SML management might do well to remember that A2 are not only key customer but also large shareholder. And they only hold their jobs for as long as suppliers, customers and shareholders are happy.

[BlackPeter]

I think it odd Brights interest given so little seems to be produced for them. A2 is essentially Dunsandles only customer.

You are right, Bright didn't gain so far a lot through Synlait apart from using them to train up young and inexperienced Chinese board members abroad, and even the value of this training would be highly questionable given the obviously lacking quality of the teachers. And of course - Bright lost so far a huge amount of capital for basically nothing in return. I think they paid in average somewhere around $3 per share ...

I still think that Synlait fits well into the foreign expansion strategy of the CCP (securing food supplies for the empire of the middle and creating foreign dependencies) - and in this game, clearly Bright is as well just another pawn on the board.

Lets wait another couple of decades and decide then, whether Synlait was a loss or a gain for the CCP, shall we? They are normally much better in playing that long game than we are.

[Minimoke]

After a bit more thought somehting else comes to mind.

It seems to me that given Synlait, and their auditors have said there is a substantial risk that SML is not a going concern this places Synlait at major risk.

This is turn creates major risk for manufactured product

And this in turn must now be a material risk to ATM in terms of being able to deliver to it forecast.

But silence from A2M.

Which leads me to conclude A2M does not see a material risk to  synlaits manufacturing output. Hmm - I wonder why?

[Waltzing]

is AT therefore in a position to make an offer... but when would they want to do this?

 

[Basil]

Bonds now 55% and climbing.  Jarden Directs interaction with the NZDX fixed interest market is not really set up for situations like this and doesn't allow bids that are materially above the offered yield.  Even a bid 10% above the offer is rejected as being too far away from market, which is clearly ridiculous in the current situation.

[Minimoke]

is AT therefore in a position to make an offer... but when would they want to do this?

 

What do we know as fact.
A2 has loads of cash on hand. Over $700m. And no debt.

A2 has very close relationships with China State Farm Agribusiness.

A2 have for many years said they have a very keen eye on merger and acquisition opportunities. That's why they won't pay a dividend.

What we can presume
A2 must have people within (and outside) looking at opportunities and constant scanning and modelling and costing and analysing.

These people probably have poorly run companies on their radar.

I've been saying Synlait has been poorly run for years. So A2 must have had their M&A people with their eyes on Synlait for years.

Therefore A2 have had years to be doing all the backroom analysis they need to do on a monthly basis on Synlait.

What is speculation?
I got wind of takeover activity in Christchurch in 2021. It never came to anything. But by all accounts it got close. Maybe it was SML.

What can we summise?
Yes. A2 is in a very good position to make a takeover offer.

As for time - well now is as good a time as any.

Unless they are waiting for binding arbitration decision to come out to drive SML share price even lower.

They have between now and mid July to take control of the situation. After that the banks will be more aggressively sticking their or in.

At the end of the day, I reckon it is now time for the A2 Board to put their money where their mouth is. If they don't see Synlait as an M&A opportunity then they have to start paying a dividend and resign - they won't find a better M&A opportunity.

[Minimoke]

Bonds now 55% and climbing.  Jarden Directs interaction with the NZDX fixed interest market is not really set up for situations like this and doesn't allow bids that are materially above the offered yield.  Even a bid 10% above the offer is rejected as being too far away from market, which is clearly ridiculous in the current situation.

57%!

[Basil]

Maybe they don't want the North Island assets ?

P.S. Interesting volume in the bonds today.  Just over 700,000 traded at an average yield of about 54% = 73 cents on the dollar.

Market is saying they're not worthless.   I am not convinced and am not a buyer of the bonds or shares.

[Left Field]

I'm not a great  fan of Chris Lee but his views on SML are on target (albeit in hindsight.)

https://www.chrislee.co.nz/taking-stock  (scroll down to find it.)

[Minimoke]

57%!

Now 62%

[Basil]

I think fair value is somewhere around 10-20 cents on the dollar whatever the yield is at that price, (62% is still 70 cents on the dollar and vastly overpriced in my view).  Fact is the markets are very weak and it's going to be increasingly hard to sell assets in the current environment.  I think the chances of this being put into receivership have gone up in recent weeks in the current extremely risky geopolitical environment.

[Basil]

Shares now at all time low of 50 cents and falling and bonds at all time high yield of 65% and climbing.

Raising money by way of an issue of shares or bonds looking less and less plausible with each passing week.

[BlackPeter]

Shares now at all time low of 50 cents and falling and bonds at all time high yield of 65% and climbing.

Raising money by way of an issue of shares or bonds looking less and less plausible with each passing week.

Maybe they should change the name from Russian roulette to Chinese roulette?

Though I think the chances for retail shareholders and bondholders to say good bye to their principle might be larger than the chances of Russian Roulette players to say good bye to their life.