The a2 Milk Company will be able to manufacture its own infant formula after it resolved a long-running dispute with Synlait Milk, which has agreed to end an exclusivity arrangement in return for a $NZ25 million ($22.6 million) payment.
The agreement will allow a2 Milk, which also supplies milk, to produce infant formula at its Mataura Valley processing plant, its first major move into manufacturing and one it expects will deliver higher margins and better returns to investors.
It also resolved an extended dispute that has plagued the two companies. Synlait and a2 Milk have a complicated relationship, with the former supplying 90 per cent of the latter’s infant formula. Synlait also holds crucial licenses allowing the products to be imported into the lucrative Chinese market. A2 Milk owns 20 per cent of Synlait.
Last year, a2 Milk said it would cancel the exclusive manufacturing rights held by Synlait, which did not accept the decision. However, on Friday, the two companies said they had agreed that those rights would expire at the end of this year.
The Mataura Valley plant has been posting losses, and a2 Milk hopes manufacturing its infant formula there will help it break even.
Under chief executive David Bortolussi, a2 Milk has taken more control of its supply chain – it previously only owned the intellectual property to the A1 protein-free milk – purchasing 75 per cent of the Mataura Valley plant in 2021.
Synlait would continue to produce a2 Milk-branded infant formula. And a2 Milk will pay Synlait $NZ24.8 million, largely fees withheld during negotiations. It has also agreed to higher pricing on certain products that Synlait manufactures for it.
Barrenjoey analyst Tom Kierath said the end of exclusivity arrangements would allow a2 Milk to bring to market more products that could support revenue growth.
“Most infant formula companies have multiple products, which enables them to better target the differing needs of customers, and the end of exclusivity should support this, in our view,” he said in a note to clients.
Shares in a2 rose more than 4.9 per cent, or 33¢, in early trade on Friday to $7.05.
Synlait holds a key licence required to import into China, which is attached to Synlait’s Dunsandel manufacturing site. Synlait said it would provide space in the Dunsandel plant for a new a2 Milk product for China, and the two companies would work together to develop this before seeking approval from regulators by 2029.
The resolution of the dispute also comes at a crucial time for Synlait, which has been suffering under significant debt and has been trying to raise emergency funding. The deal with a2 Milk – which owns 19.8 per cent of the dairy processor – is conditional on the equity raise being completed and banking facilities being refinanced.
“[A2 Milk] has agreed to support and subscribe for shares under Synlait’s equity raise,” the company said in a statement on Friday, adding the decision highlighted the strategic importance of being able to continue production at the Dunsandel site.
The settlement, a2 Milk said, would not impact its earnings in the past financial year, which the company expects to announce on Monday.
Barrenjoey’s Mr Kierath said he did not see any material financial implications from the settlement, given a2 Milk had some $NZ911 million in cash.
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