The deepening split between A2 Milk (ASX:A2M) and Synlait, its key infant formula supplier, wiped tens of millions of dollars off the market value of both companies on Monday when Synlait escalated the argument. This came after A2 Milk revealed it had started the process to end a key exclusive supply deal.
Shares in Synlait dropped 9.4% to a record low of $NZ1.16 after coming off a trading halt on Monday afternoon. The halt was called by the company first thing Monday after A2 Milk’s shock announcement about the cancellation of the key infant formula supply contract with Synlait for China, Australia, and several other markets.
The continuing argument throughout the day saw Synlait shares become the biggest decliner on the NZX and lose more than two-thirds of their value this year. A2 Milk dropped 1% to $4.83 and is down 35.6% this year.
While the market reaction to A2 Milk was not as dramatic as the way Synlait was mauled, A2 will suffer because it owns 19.83% of Synlait. Synlait has the exclusive supply and manufacturing rights over A2 Milk’s Stage One, Two, and Three infant milk formula products sold by A2 Milk in China, Australia, and New Zealand. The company’s Stage Four formula and other A2 Milk products supplied by Synlait are not subject to exclusivity, and A2 says that deal will continue.
A2 Milk said in a statement to the NZX on Monday morning that it had given Synlait written notice cancelling the exclusive manufacturing and supply rights after market hours on Friday. Synlait naturally disputes that A2 Milk has the right to cancel the exclusivity arrangements, the company said in a statement to the NZX on Monday afternoon.
A2 Milk said removal of Synlait’s exclusivity would provide it with the option to produce its A2 Platinum English label product at any facility in the future, including the Mataura Valley Milk factory in Southland that it owns with China Animal Husbandry Group – which analysts suggest could be what A2 Milk wants from the disagreement.
In Monday afternoon’s statement, Synlait also said that it remains on track to release its full-year 2023 (FY23) results on next Monday, September 25.
“Today’s announcement by The A2 Milk Company has no impact on its FY23 performance, which remains within the net profit after tax (NPAT) guidance range of a net loss of ($5) million to a net profit of $5 million previously announced. The A2 Milk Company’s announcement is also not expected to impact Synlait’s full-year 2024 (FY24) results,” Synlait added.
But ominously for A2 (but perhaps a possible joy for lawyers), Synlait left the impression that the brawl could get even nastier. Synlait noted that it “continues to hold the Chinese regulatory State Administration for Market Regulation (SAMR) license, which is attached to Synlait’s Dunsandel manufacturing facilities. The license is for The a2 Milk Company’s Chinese-labeled ® Infant Formula (stages one, two, and three). The company expects to manufacture those products for The a2 Milk Company for products destined for the China market for the period of that license (currently expiring September 2027).”
That was the final point in the afternoon statement and seems to have been designed to leave that point (and the implied threat) as the last thing investors and analysts will note.
What will be interesting will be the reaction of Chinese regulators to this brawl between two suppliers of a very sensitive consumer product.