Kiwi dairy groups, a2 Milk (ASX:A2M) and Synlait (ASX:SM1), have kissed and made up after their recent split that nearly pushed Synlait to the wall.
The split occurred when a2 last year gave Synlait Milk written notice (as required) to cancel the exclusive manufacturing and supply rights for stages 1 to 3 of its current infant milk formula (IMF) products for China, Australia, and New Zealand. Such a move would have devastated Synlait, which did not take this lightly and, after failed good-faith negotiations, decided to pursue arbitration.
To resolve what seemed like an intractable dispute, the two companies agreed to confidential binding arbitration.
Meanwhile, Synlait was struggling with the financial costs of a failing expansion plan. Its finances were under pressure, and to repay nervous banks, it attempted a capital raising but was unsuccessful. It also tried to secure new loans before finally asking its major Chinese shareholder, Bright Dairy, for a NZ$130 million loan.
This was a related-party deal requiring shareholder approval, including a2's sign-off and vote at a shareholder meeting in July, which was eventually granted. This allowed the banks to be repaid, and over the past month, it has become clear that relations have stabilized and the arbitration process was nearing completion.
On Friday, a2 informed stock exchanges that a conditional deal had been reached. The settlement covers the exclusivity dispute, pricing disputes, and various other disagreements.
The nearly 5% rise in a2 Milk's share price indicates a favorable settlement for the company. Synlait's shares are up about 16%, suggesting it is also a winner. The company can now focus on a capital raising, which should be easier with the uncertainty surrounding its future largely resolved.
In Friday's statement, a2M said, "Synlait accepts the validity of a2M's notice dated 15 September 2023 cancelling the exclusive manufacturing and supply rights enjoyed by Synlait in respect of stages 1 to 3 of a2M's current infant milk formula products for sale by a2M in the markets of China, Australia and New Zealand."
Synlait's manufacturing and supply exclusivity ends on 1 January 2025. It also acknowledges that a2 Milk owns the intellectual property rights for its infant formula products.
a2M "owns the intellectual property rights for the Product Specifications of the IMF products and is free from any restrictions or obligations under the Nutritional Products Manufacturing and Supply Agreement (NPMSA) to source any Products from any person including Synlait, third party suppliers or internally."
This settlement is conditional on Synlait Milk completing its equity raise and refinancing its existing banking facilities. a2 Milk has agreed to support and subscribe for shares under Synlait's equity raise, subject to finalizing terms.
If the settlement conditions are met, the arbitration to resolve the disputes will be discontinued. Until then, the arbitration proceedings have been adjourned.
