SML - Synlait Milk Ltd

[Balance]

So if bail out does not take place, is when negotiations that have already taken place have been decided between Bright and A2M to take over company. Or are there other options?

They would have canvassed joint takeover as an option but for whatever reason, have decided not to pursue that option.

No other option on the table - it's either the Bright loan (terms look perfectly reasonable - much to my surprise) or insolvency given the time frame involved.

Unless A2 wants to launch a takeover bid - LOL.

[silverblizzard888]

Terms of the loan: (on these terms basically kicking the can down the road till they get the capital raising done)

First 12 months of the Loan, interest is payable quarterly at 8% pa. If the extension option is exercised, the interest rate resets and will be equal to quarterly BKBM + 1.60% pa (payable quarterly). In certain circumstances (where an “Interest Deferral Event” exists), Synlait has the right for interest to be capitalised rather than paid in cash


All in the hands of A2 right now with 33% influence on the vote, they will also be considering the effects of this loan and further down whether they want to be participating in the capital raise:

Bright is not able to vote in favour of the Shareholder Loan. A2 Milk holder of 19.8% of the shares (which equates to approximately 33% of the votes eligible to be cast on the resolution), will be influential in determining the outcome of the resolution to approve the Shareholder Loan.

Capital raising fully supported by Bright and will increase overall percentage holding of the company, especially if many shareholders are absent in the raise:

We believe that Bright's shareholding in Synlait is likely to increase as a result of the Equity Raising. In these circumstances, Bright’s participation in the Equity Raising would require shareholder approvals under both the NZX Listing Rules

[Rawz]

What a disaster. $0.29 per share. $69m market cap. What would I do if I found myself holding right now? hmmm. Is it better to sell (assuming there are buyers) and move to safer bets? Where is the best upside, there sure is upside here. Where is the least downside? Definitely not here.

I would bet the loan goes through with high probability (90% like). But get it wrong and it's 100% loss of todays investment. Compared to bets elsewhere, get it wrong (profit downgrade) at say TWR or 2CC and downside is not very much. Not 100% like SML...

If it was less than 5% of my portfolio i would stay invested. If over this I would sell and move to safer bets with upside and very little downside.

Just rambling here,,

[Newman]

"On behalf of Bright Dairy Appointed Directors, Director Julia Zhu commented: “In line with Bright’s long-term support of the New Zealand agriculture sector, in particular, Synlait’s business, its farmers, staff, and all shareholders – this $130 million shareholder loan facility is one part of Bright’s wider support to see Synlait return to a much stronger financial and operating position, as early as practicable in this economic cycle.”
“We are deeply committed to Synlait, believing its assets and operations to offer significant value and opportunity within regional and global dairy markets. Notwithstanding Synlait’s short-term challenges, we see a pathway to growth and future value, and we will continue to work closely with the Board and management team to do what we can to help with the company’s turnaround plan.”


My interpretation: Bright Dairy has options if A2M votes against the loan, there is no way A2M could cheaply buy the Dunsandel plant, and small shareholders and bondholders do not need to worry about being left with nothing.

[silverblizzard888]

A2 can't let Synlait fail since it holds the SAMR in its name, so never mind the assets they need the company itself or their business may be interrupted. They will approve the loan and participate in the capital raise, or they will vote to not approve and launch a takeover of Synlait by way of a merger with Bright getting shares in A2 and a board seat, along with a partnership agreement.

[Bikeguy]

"On behalf of Bright Dairy Appointed Directors, Director Julia Zhu commented: “In line with Bright’s long-term support of the New Zealand agriculture sector, in particular, Synlait’s business, its farmers, staff, and all shareholders – this $130 million shareholder loan facility is one part of Bright’s wider support to see Synlait return to a much stronger financial and operating position, as early as practicable in this economic cycle.”
“We are deeply committed to Synlait, believing its assets and operations to offer significant value and opportunity within regional and global dairy markets. Notwithstanding Synlait’s short-term challenges, we see a pathway to growth and future value, and we will continue to work closely with the Board and management team to do what we can to help with the company’s turnaround plan.”


My interpretation: Bright Dairy has options if A2M votes against the loan, there is no way A2M could cheaply buy the Dunsandel plant, and small shareholders and bondholders do not need to worry about being left with nothing.

I agree with you…Bright could not have made it any plainer, they are going to do what it takes to keep SML going.

[Snoopy]

A2 can't let Synlait fail since it holds the SAMR in its name, so never mind the assets they need the company itself or their business may be interrupted. They will approve the loan and participate in the capital raise, or they will vote to not approve and launch a takeover of Synlait by way of a merger with Bright getting shares in A2 and a board seat, along with a partnership agreement.

I am not sure this is right. If Synlait goes down, the SAMR is not lost. It is just that management of what was Synlait, transfers from 'the Synlait team' to 'the receivers team'. The receivers would realise that a key part of the value of what they now manage, is the ability of the Dunsandel plant to supply ATM, where the SAMR is critical. The receivers would be crazy to pull the plug on an arrangement like that, critical to valuing the underlying assets they would have for sale. The way I see it, Synlait 'going down' might benefit A2 because:

i/ It would put to bed the current supply agreement fracas with Synlait management, who would be gone.
ii/ They would retain the milk product supply contract with the Dunsandel plant, but possibly on more favourable terms, because the receivers would be desperate to keep the contract going.

Sure A2 would lose the equity they have already put into the Synlait business (although in fairness that realistically went out the door some time ago). But taking the forward looking view only, it looks like receivership for Synlait would suit A2 very well. What am I missing?

One thing I could be missing is the risk of an unnamed third party snatching the Dunsandel assets. But such a third party when bidding would have to also factor in signing up new supply contracts to replace all the existing farmers who want out. Otherwise they would just be buying a milk plant with no milk to process, which doesn't sound like a value proposition. So A2 may have already figured out that, should Synlait go into receivership, no-one would realistically be able to outbid them for those Dunsandel Assets when they are eventually resold. And only A2 as a dairy company is in a strong enough position to offer farmers threatening to leave the Synlait supply chain, a milk price good enough to keep them from going.

SNOOPY

[Balance]

A change in SML’s ownership will also trigger a review of the SAMR.

[Newman]

I am not sure this is right. If Synlait goes down, the SAMR is not lost. It is just that management of what was Synlait, transfers from 'the Synlait team' to 'the receivers team'. The receivers would realise that a key part of the value of what they now manage, is the ability of the Dunsandel plant to supply ATM, where the SAMR is critical. The receivers would be crazy to pull the plug on an arrangement like that, critical to valuing the underlying assets they would have for sale. The way I see it, Synlait 'going down' might benefit A2 because:

i/ It would put to bed the current supply agreement fracas with Synlait management, who would be gone.
ii/ They would retain the milk product supply contract with the Dunsandel plant, but possibly on more favourable terms, because the receivers would be desperate to keep the contract going.

Sure A2 would lose the equity they have already put into the Synlait business (although in fairness that realistically went out the door some time ago). But taking the forward looking view only, it looks like receivership for Synlait would suit A2 very well. What am I missing?

One thing I could be missing is the risk of an unnamed third party snatching the Dunsandel assets. But such a third party would have to also factor in signing up new supply contracts to replace all the existing farmers who want out. Otherwise they would just be buying a milk plant with no milk to process, which doesn't sound like a value proposition. So A2 may have already figured out that, should Synlait go into receivership, no-one would realistically be able to outbid them for those Dunsandel Assets when they are eventually resold.

SNOOPY

Receivership and the sale of assets at a discount are not acceptable to Bright Dairy for a very simple reason: The board members representing Bright Dairy would be sent to jail in China. They should have reached an agreement with Chinese banks in New Zealand to force A2M to pay a premium to assets should it buy the Dunsandel plant.

[silverblizzard888]

Theres a few scenarios that could go wrong if A2 decides to play with fire:
1. If they upset Bright they may use their political capital to have the SAMR revoked or not renewed in the future
2. If a big player with market share in China's infant formula wanted to deal a deadly blow to A2's market share in China they would take Dunsandel, theres big companies with much deeper pockets than A2 out there. Even Abbott may take an interest since Synlait is approved to produce infant formula for them in the US.
3. Bright might end up with Dunsandel since it values those assets quite highly