SML - Synlait

[Minimoke]

How so?

Like SKT or Sir NZ were gone burgers before  their CRs? Then we are indeed in agreement.

As mentioned I can't comment on SKT. But AirNZ got bailed out by tax payer money (incidentally I did very, very nicely out of that Ansett kerfuffle), but really they should have been put into receivership and allowed to clear the books of the debt.

You can't have been following my posts.
So very quickly
- they have flagged the need to sell dairyworks and are looking at the sale of Pokeno. Those are major changes
- theres over $500m of debt to be paid off in the next 12 months. And cash flow won't do it.
- I don't see a debt for equity plan working (you may and if you do please explain)
- I see a debt for security over capital working. And when Synlait eventually goes bust the capital will transfer hands
- Any equity raise has to involve massive share dilution and will require approval from shareholders.

Basically if Bright have control Synlait is not the synlait of the past.

[Teitei]

As mentioned I can't comment on SKT. But AirNZ got bailed out by tax payer money (incidentally I did very, very nicely out of that Ansett kerfuffle), but really they should have been put into receivership and allowed to clear the books of the debt.

You can't have been following my posts.
So very quickly
- they have flagged the need to sell dairyworks and are looking at the sale of Pokeno. Those are major changes
- theres over $500m of debt to be paid off in the next 12 months. And cash flow won't do it.
- I don't see a debt for equity plan working (you may and if you do please explain)
- I see a debt for security over capital working. And when Synlait eventually goes bust the capital will transfer hands
- Any equity raise has to involve massive share dilution and will require approval from shareholders.

Basically if Bright have control Synlait is not the synlait of the past.

But of course, SML will not be the SML of the past - just it has not been since the ill-fated $400m spent on Pokeno. 

But Synlait getting access to Bright's distribution channels under Bright's control (just like Westland under Yili) will gain huge leverage to the Chinese market. Not hard to see why Bright has not played that card just yet as a 39% shareholder - why give up 60% of the upside to others?

Re your other points :

1.  SML under Bright will keep Dairyworks & Pokeno.

2.  SML do not need to pay off all $500m of debt - $130m Bright loan + CR of $120m will bring debt to a bankable level (read China banks). Have a look at Westland's financials and you will see what I mean. Banks are in the business of lending to good credit and yes, they are fair weather sailors. As is often said, banks will lend you an umbrella on a sunny day but ask for it back when it rains.

3.  I wrote a while back that I believed Bright will do a convertible note issue and I still hold that view - $130m. Will require other shareholders' approval as the note will allow Bright to increase its stake in the event of conversion. The lower the SML sp, the more favourable for Bright.

4. Debt for security will not pass as it cuts A2M completely out of contention so hard to see A2M voting for it.

5. Any CR (whether highly diltuive or not) requires shareholders' approval - refer SKT's 2.83 for 1 at 12c to raise $157m when its market cap was $85m.

[Minimoke]

But of course, SML will not be the SML of the past - just it has not been since the ill-fated $400m spent on Pokeno. 

But Synlait getting access to Bright's distribution channels under Bright's control (just like Westland under Yili) will gain huge leverage to the Chinese market. Not hard to see why Bright has not played that card just yet as a 39% shareholder - why give up 60% of the upside to others?

Re your other points :

1.  SML under Bright will keep Dairyworks & Pokeno.

2.  SML do not need to pay off all $500m of debt - $130m Bright loan + CR of $120m will bring debt to a bankable level (read China banks). Have a look at Westland's financials and you will see what I mean. Banks are in the business of lending to good credit and yes, they are fair weather sailors. As is often said, banks will lend you an umbrella on a sunny day but ask for it back when it rains.

3.  I wrote a while back that I believed Bright will do a convertible note issue and I still hold that view - $130m. Will require other shareholders' approval as the note will allow Bright to increase its stake in the event of conversion. The lower the SML sp, the more favourable for Bright.

4. Debt for security will not pass as it cuts A2M completely out of contention so hard to see A2M voting for it.

5. Any CR (whether highly diltuive or not) requires shareholders' approval - refer SKT's 2.83 for 1 at 12c to raise $157m when its market cap was $85m.

Lets test my logic and math.

Lets say the note converts at 90% of the VWAP over 5 days. And the VWAP = $0.40

This would give a price of $0.36

Which means Bright would get 361,111,111 new shares

Which would lift the registry to 597,692,772 issued shares.

Which would give Bright a 77% holding. A2 with 7.48% (was 19.38%), ACC with 1.36% (was 3.61% and John Penno 0.88% (was 2.34%)

And if pre conversion Synlait had a market cap of $87.432m. Market cap remains the same. So share price post conversion would be $0.151

[Teitei]

Lets test my logic and math.

Lets say the note converts at 90% of the VWAP over 5 days. And the VWAP = $0.40

This would give a price of $0.36

Which means Bright would get 361,111,111 new shares

Which would lift the registry to 597,692,772 issued shares.

Which would give Bright a 77% holding. A2 with 7.48% (was 19.38%), ACC with 1.36% (was 3.61% and John Penno 0.88% (was 2.34%)

And if pre conversion Synlait had a market cap of $87.432m. Market cap remains the same. So share price post conversion would be $0.151

A few points to note, assuming I am correct about a convertible note issue.

1.  The conversion price is usually much higher than prevailing market sp due to the embedded conversion option in the note. Also, it could be based upon the share price closer to the note maturity date. Reference point however will be existing market sp which is why the lower it is now, the better for the holder.

2.  The very fact that a shareholder with deep pockets and commitment is pumping in money and support will tend to lift the sp and market cap. In this case, unlikely as there is a CR to come.

3.  Market cap will not remain the same after the conversion - it will depend on the state of the company at the time of conversion.

There's more water to flow under the bridge with SML and while Bright holds the cards, there are quite a number of regulatory and compliance issues and requirements which will have to be settled.

[Minimoke]

A few points to note, assuming I am correct about a convertible note issue.

1.  The conversion price is usually much higher than prevailing market sp due to the embedded conversion option in the note. Also, it could be based upon the share price closer to the note maturity date. Reference point however will be existing market sp which is why the lower it is now, the better for the holder.

2.  The very fact that a shareholder with deep pockets and commitment is pumping in money and support will tend to lift the sp and market cap. In this case, unlikely as there is a CR to come.

3.  Market cap will not remain the same after the conversion - it will depend on the state of the company at the time of conversion.

There's more water to flow under the bridge with SML and while Bright holds the cards, there are quite a number of regulatory and compliance issues and requirements which will have to be settled.

Thanks. I only used $0.40 as it seemed a simple number given that's the current approx SP.

But lets look a scenario that the market loves what is happening and the SP doubles to $0.80 (I Think this is highly un-realistic - but lets run with it)

I end up with 399,137,217 shares . And Bright with 66.6%, A2 with 10.86%, ACC with 1.97% and John penno with 1.28%

I've left out the Cap raise, because quite frankly my head is starting to melt. What would this do to the share registry and share price. Some much is variable with how much the cap raise is for - I reckon it needs to be at least $180m to put to bed the bonds but it could just be $50m. And at what price. I assume it would have to be at a discount to current share price.

So who would enter into a convertible note with this swinging brick of variables?

Geez - its very complicated (or Am I over complicating it?)

[Teitei]

Thanks. I only used $0.40 as it seemed a simple number given that's the current approx SP.

But lets look a scenario that the market loves what is happening and the SP doubles to $0.80 (I Think this is highly un-realistic - but lets run with it)

I end up with 399,137,217 shares . And Bright with 66.6%, A2 with 10.86%, ACC with 1.97% and John penno with 1.28%

I've left out the Cap raise, because quite frankly my head is starting to melt. What would this do to the share registry and share price. Some much is variable with how much the cap raise is for - I reckon it needs to be at least $180m to put to bed the bonds but it could just be $50m. And at what price. I assume it would have to be at a discount to current share price.

So who would enter into a convertible note with this swinging brick of variables?

Geez - its very complicated (or Am I over complicating it?)

Ball park, your numbers are correct - I get Bright ending up with 65% and A2M with 11.4% of SML if the notes convert to shares at 80c per share.

Existing # shares = 218.6m
Convertible @80c = 162.5m
Total # shares after conversion = 381.1m

As an aside, if the notes convert at 60c, Bright will end up with 70% and A2M 10%.

Bright would enter into the convertible note as it will deliver majority control. Requires other shareholders (especially A2M) to approve such an arrangement. 

But hi, you could be right and the loan is simply a loan secured against an asset. That will require the waiver & agreement of the banks.

CR should be relatively simple - assuming it's pro-rata to all shareholders, the shareholdings of all shareholders will be maintained if all shareholders take up their rights. Realistically there will be a shortfall so if Bright is the underwriter, then Bright's stake will increase again depending on what is the shortfall.

 

[Minimoke]

Ball park, your numbers are correct - I get Bright ending up with 65% and A2M with 11.4% of SML if the notes convert to shares at 80c per share.

Existing # shares = 218.6m
Convertible @80c = 162.5m
Total # shares after conversion = 381.1m

As an aside, if the notes convert at 60c, Bright will end up with 70% and A2M 10%.

Bright would enter into the convertible note as it will deliver majority control. Requires other shareholders (especially A2M) to approve such an arrangement. 

But hi, you could be right and the loan is simply a loan secured against an asset. That will require the waiver & agreement of the banks.

CR should be relatively simple - assuming it's pro-rata to all shareholders, the shareholdings of all shareholders will be maintained if all shareholders take up their rights. Realistically there will be a shortfall so if Bright is the underwriter, then Bright's stake will increase again depending on what is the shortfall.

 

So we are basically in agreement. No matter how we cut it Bright become a Majority shareholder and A2 a minnow shareholder.

Given Bright is already a more than 20% shareholder, if they increase their stake from their current position then this is a Change of Control event so the Takeover Code applies. And it takes them well over the 50% threshold

Thus shareholders have to approve both the loan arrangements and the increase in control.

Now, back to your scenario. If Bright end up with 70% through a 0.60 conversion and say another 10% as an underwriter of rights (would that happen??) they are on 80%. Which isn't far from the 90% compulsory takeover provisions. It wouldn't take much of a turn in the share price to increase the convertible allocation and thus over 90% and full takeover happens.

I think I said this earlier - Synlait is no more.

[CG]

It seems people here either are not aware or ignore the fact that Bright already has ultimate control over Synlait since 2010 when it became a major shareholder with 51% and by way of special arrangement since IPO with 39%. They won't gain any more control by increasing their shareholding. But what will happen if they decide to do so, their special arrangement will be canceled and by standard rules they would have to make full takeover offer and if such offer accepted by other shareholders Bright will end up solely responsible for half a billion dollars debt which Synlait currently has and production capacity no-one needs. I don't think they are really keen on that.
Also you need to review long standing assumption that A2M have no choice and have no say in all of that. DB is on record as saying that the need for A2M of having a blocking stake in Synlait is no longer the case. It was some years ago but not any longer. Without A2M orders Synlait is worthless as it accounts for about 40-50% of revenue. Supply agreement between A2M and Synlait will stand regardless of who is the owner (probably except bankruptcy case) and no owner in their right mind will cancel it. By not participating in possible CR A2M will either force Bright to make full takeover offer (see above) or find someone else to replace A2M as shareholder. A2m in that case could have some advantages to negotiate removal of "exclusivity clause" in exchange for maintaining its stake. This is what I would do.

[Minimoke]

It seems people here either are not aware or ignore the fact that Bright already has ultimate control over Synlait since 2010 when it became a major shareholder with 51% and by way of special arrangement since IPO with 39%.

The special arrangement has been mentioned before below.

This changed in 2013 with a new constitution that provided for Bright  having up to 4 directors for so long as their shareholding was between 37 and 50%.

If their ownership level drops below the initial level then they  risk losing a director. Hence they can be guaranteed to participate in a capital raise where new equity  comes into play. But. If they get more than 50% of the company then they right to the 4 board member ceases all together. At which point there has to be at least 3 and no more than 8 directors.
There also needs to be at least 3 independent directors.

They won't gain any more control by increasing their shareholding. But what will happen if they decide to do so, their special arrangement will be canceled and by standard rules they would have to make full takeover offer and if such offer accepted by other shareholders Bright will end up solely responsible for half a billion dollars debt which Synlait currently has and production capacity no-one needs. I don't think they are really keen on that.
Also you need to review long standing assumption that A2M have no choice and have no say in all of that. DB is on record as saying that the need for A2M of having a blocking stake in Synlait is no longer the case. It was some years ago but not any longer. Without A2M orders Synlait is worthless as it accounts for about 40-50% of revenue. Supply agreement between A2M and Synlait will stand regardless of who is the owner (probably except bankruptcy case) and no owner in their right mind will cancel it. By not participating in possible CR A2M will either force Bright to make full takeover offer (see above) or find someone else to replace A2M as shareholder. A2m in that case could have some advantages to negotiate removal of "exclusivity clause" in exchange for maintaining its stake. This is what I would do.

A2, as I recall is still a bit limited in getting Chinese Label produced locally. I think they can get some out of Yashelli in auckland (as they have SAMR) but doubt this will meet market needs. Mataura is still a way form being fully functional.

As an aside A2, given the recent waiver A2 might now be more than 50% of Synlaits revenue.

All that said, I'm still not sure what Bright gets out of the synlait ownership.

[CG]

A2, as I recall is still a bit limited in getting Chinese Label produced locally. I think they can get some out of Yashelli in auckland (as they have SAMR) but doubt this will meet market needs. Mataura is still a way form being fully functional.

As an aside A2, given the recent waiver A2 might now be more than 50% of Synlaits revenue.

All that said, I'm still not sure what Bright gets out of the synlait ownership.

Platinum Chinese label will be produced by Synlait for long time. A2M have no intentions to cancel the contract, not at this stage anyway. Contract can be terminated by either party on three years' notice. Whoever will own Synlait would have to supply a2 platinum for at least another 3 years.

Yashelli's SAMR or anyone's SAMR for that matter has nothing to do with anything. SAMR is "attached" to production facility + product. A2M would have to obtain a new SAMR for any new Chinese label product produced by Synlait at Dunsandel or any new or existing product produced by anyone else including Synlait at Pokeno. I understand A2M currently getting ready to introduce another ultra premium product for Chinese market and I suspect they will apply for new SAMR for that product, I just don't know where production will be.

From full ownership Bright will get more headache.

[Left Field]

Crikey, it's interesting..... and complicated. Thanks all for your contributions.

[Minimoke]

Platinum Chinese label will be produced by Synlait for long time. A2M have no intentions to cancel the contract, not at this stage anyway. Contract can be terminated by either party on three years' notice. Whoever will own Synlait would have to supply a2 platinum for at least another 3 years.

The SAMR will be for Synlait Ltd Dunsandel. If Synlait no longer exists what then? The new owner of Dunsandel can't be forced into a contractual relationship with A2.

I wonder how long it would take for a new SAMR with new owners name on it.

Yashelli's SAMR or anyone's SAMR for that matter has nothing to do with anything. SAMR is "attached" to production facility + product. A2M would have to obtain a new SAMR for any new Chinese label product produced by Synlait at Dunsandel or any new or existing product produced by anyone else including Synlait at Pokeno. I understand A2M currently getting ready to introduce another ultra premium product for Chinese market and I suspect they will apply for new SAMR for that product, I just don't know where production will be.

From full ownership Bright will get more headache.

I mentioned Yashili because they are already processing A2 protein only milk. Which means they have production lines geared to keep A1 protein out.

I wouldn't be surprised if A2 are  introducing a new product. They are not very good at letting the market know of these things and they are usually discovered through social media.

[Teitei]

A2M has contracted Yashili to produce A2 Gentle Gold from its Pokeno plant. Scheduled to be launched in 2H2024.

[CG]

A2 Gentle Gold

A2 Gentle Gold is not ultra premium and has been on the shelves in AU and China (online) for a couple of months now. I was talking about new ultra premium product (I don't think it has been named yet) due 1H25FY

[Minimoke]

Crikey, it's interesting..... and complicated. Thanks all for your contributions.

There really will be text books written about Synlait.