Keith Woodford takes a detailed look at the possible ways the Synlait mess will get resolved. Its shareholders may lose everything but the business will continue in some form

In a recent article I tracked the massive decline of Synlait. The decline has been a saga of muddled strategy, over confidence, and bad execution. Perhaps also there were some black swans that flew in over the horizon. But predominantly, Synlait can only blame itself.

In my previous article, I Iaid out the journey of the last eight years. It was a journey of a more than 95% decline in the share price, and an associated loss of equity. However, I did not analyse the path ahead in any detail.

Here I take up the issue of what can Synlait do now with a focus on the financial hole.

Since that previous article, Synlait has announced that its banking syndicate, comprising nine banks of which seven are Chinese, and with only one of the nine based in New Zealand (albeit Australian owned), has agreed to a $320 million package of debt over the next 12 months. There is also a $130 million shareholder loan from Bright Dairy.  

The debt agreements are for only one year.

The debt sits alongside a share price, as I write this article, of 39 cents, giving a market capitalisation of just $235 million.

This market capitalisation reflects that the market has lost confidence in Synlait. This is despite the books still showing a book net value of over $700 million. The problem is that those book assets have been working in a business that keeps losing money.

I know those assets are real. I see them every time I drive south from Christchurch. But what are those loss-making assets really worth?

The bottom line is that Synlait would already be in liquidation if it were not for those Chinese banks that have been supporting Synlait since 2024, plus the shareholder loan from Bright itself. New Zealand banks would have lost confidence quite some time ago.

In essence, Synlait has 12 months to sort itself out or it will indeed be in liquidation.  

Given the existing business structure, it is highly unlikely that any external entity would consider an injection of equity capital. Within this existing structure of debt, equity and losses, it would be too risky.

That means that Bright, as the 65% majority holder of Synlait, is the only one who could right now come to the rescue. They could do this in an attempt to protect their existing investment.

Bright itself is a complex structure.

Bright’s ownership in Synlait is via a publicly listed company on the Shanghai stock exchange. But behind that sits a massive state-owned parent company owned by the Shanghai State.

It is this same state owned parent company that, through another subsidiary, owns 50% of Siler Fern Farms here in New Zealand

New equity would need to come from the parent company rather than the listed Shanghai company, which is already reporting a loss this year, consequent to carrying Synlait’s latest operational disasters.

If Synlait is to survive long-term, then it needs the support of its dairy-supply farmers. There are approximately 200 of these.

These dairy-supply farmers are required to give three years notice of supply termination. Right now, most of these farmers are committed by contract through to May 2028. Another year’s commitment of the rolling contract is currently due. 

The only way that Synlait can get the farmer commitments that it needs is by offering milk payment incentives over and above Fonterra’s payout. That of course puts further pressure on Synlait’s bottom line.

The farmer risk to Synlait is that in the coming months a significant proportion of its farmers will not renew their supply contract past 2028. That would be another disaster. No dairy company can survive without the confidence of its dairy farmers.

My own judgement is therefore that the only path that gives confidence in regard to survival is a substantial equity injection from Bright.

If that injection does not come, then my judgment is that Synlait will be in liquidation no later than May 2027.

However, that does not mean the plant would lie idle thereafter.

The idea that the 200 farmers would be pouring the milk from well over 100,000 cows down the drain is not going to happen. The Government would have to step in to ensure that an orderly transfer of the assets to another owner occurred.

Once liquidation commences, then new buyers of the assets would appear. Liquidation would allow them to take over the assets but not the debts.  That is much more attractive than buying into the existing company.

The most likely buyers would be Yili or Open Country.  Or it could be Olam from Singapore, which has two new big dryers at its Tokoroa factory. Or perhaps it could be Synlait’s minority shareholder, The a2 Milk Company.

If liquidation were to occur, then the banks would get much and perhaps all of their money back. The shareholders would probably get close to nothing.

If Yili were the buyer, then Synlait would complement its existing Westland (Hokitika) and Oceania (Glenavy) factories, both of which are profitable. 

If Open Country were the buyer, then it would consolidate its position as New Zealand’s second largest dairy processor. This would take its national share from around 11.3% of New Zealand’s milk to around 16%. Given that Open Country is privately owned by the Talley family, there are no public indications of their ability to stump up with the necessary capital.

If The a2 Milk Company were to buy the assets, it would give them the ability to produce more infant formula than is possible from just their Pokeno factory. That could be an attractive option and I have little doubt they could fund it.  That could be the most exciting option.

All of the above illustrates how the New Zealand dairy industry is dynamic. Go back 25 years and all of the dairy processing was undertaken by farmer-owned cooperatives. Currently we have at least eight international giant companies that have invested in either a big or small way into the processing and marketing of New Zealand milk.

Synlait is not the first New Zealand dairy company to get into difficulty. The two most recent companies to sell out under pressure, both in the last 12 months, have been Miraka in the North Island and Mataura Valley Milk in Southland. Both were snapped up at bargain prices by Open Country Milk. Both are reportedly profitable under their new management but there are no profit data available.

Looking back at Synlait’s history, an overarching conclusion is that Synlait demonstrated over confidence. All profits were ploughed back in the business, not to pay off debt but to finance growth.

Since first processing milk in 2008, Synlait has never paid a dividend to its shareholders. It was all about growth.

Somewhere along the journey, lack of financial resilience eventually caught up with the company. The combination of North Island expansion, plus COVID, plus operational short-cuts proved fatal.

*Keith Woodford ONZM was Professor of Farm Management and Agribusiness at Lincoln University for 15 years through to 2015. He is now Principal Consultant at AgriFood Systems Ltd. You can contact him directly here.