A2 Milk in 'strategic partnership' with Fonterra; Comprehensive deal outlined - but no financial figures

By David Hargreaves

Sharemarket darling the a2 Milk Company - which has now become New Zealand's biggest stock exchange-listed company by market value - and giant co-operative Fonterra have announced what is being termed "a comprehensive strategic relationship".

While the deal looks substantial and very significant, neither party has disclosed any financial figures in the relationship.

A statement from the a2 company describes the new relationship as "wide-ranging". 

It includes an agreement under which Fonterra will exclusively supply A1 protein free milk products in both bulk powder form and consumer packaged form to the a2 company.

Also, Fonterra has entered into an exclusive licensing agreement for the production, distribution, sale and marketing of a2 Milk™ branded fresh milk for end sale in the New Zealand market. As part of the New Zealand fresh milk licence, Fonterra will, with support from a2MC, establish an A1 protein free milk pool in New Zealand.

The announcement came on the day in which the a2 company announced a 150% leap in half-year profits after-tax to $98.5 million. Investors were clearly enthused by the combination of profit hike and the Fonterra link. The share price shot up in excess of 20% to a new high of over $11.

This is the statement from the a2 Milk Company:

The a2 Milk Company Limited (‘a2MC’) is pleased to announce the formation of a comprehensive strategic relationship with Fonterra Co-operative Group Limited (‘Fonterra’) encompassing a range of supply, distribution, sales and marketing arrangements in targeted markets.

This is a significant development for a2MC given the wide-ranging nature of the relationship. The arrangements expand a2MC’s ability to build its business in new priority markets and beyond, provide exciting growth initiatives in new A1 protein free products and enable consumers to obtain new and innovative milk products.

The initial scope of the relationship incorporates the following elements:

Nutritional Products Manufacturing and Supply Agreement (NPMSA)

The companies have entered into an NPMSA under which Fonterra will exclusively supply A1 protein free milk products in both bulk powder form and consumer packaged form to a2MC.

Within this agreement, Fonterra has been granted exclusive supply rights for certain nutritional products destined for sale in certain a2MC new priority markets in South East Asia and the Middle East up to a specified volume. In return for these rights, a2MC has become a strategic customer of Fonterra with allocation of production capacity as volume grows and competitive commercial terms. The products will be manufactured at Fonterra’s Darnum facility in Victoria, Australia, and packaged into consumer packaged form at Fonterra’s facility in Hamilton, New Zealand. To support the agreement, a new A1 protein free milk pool will be developed in Australia in conjunction with a2MC.

New Zealand Fresh Milk Licence

Fonterra has entered into an exclusive licensing agreement for the production, distribution, sale and marketing of a2 Milk™ branded fresh milk for end sale in the New Zealand market. As part of the New Zealand fresh milk licence, Fonterra will with support from a2MC, establish an A1 protein free milk pool in New Zealand.

a2MC will provide Fonterra with access to a2MC’s systems and know-how relating to the sourcing, processing and marketing of a2 Milk™. Fonterra will leverage its substantial capabilities in the New Zealand milk market to establish distribution across the country.

Distribution and Sales Arrangements

As an extension of the NPMSA, the companies will seek to establish distribution and sales arrangements where Fonterra has resources and execution capability to assist a2MC’s market entry strategies in the new priority markets. The services may relate to any of importation, registration, warehousing and sales and distribution.

Exclusive period to explore a2MC branded butter and cheese, and China sourced liquid milk

This includes evaluating and, if appropriate, negotiating commercial arrangements for the sale of certain new a2MC branded A1 protein free products in Australia, New Zealand and China. These arrangements relate to traditional dairy products not presently marketed by a2MC, including butter and cheese, as opposed to nutritional products, and would be complementary to Fonterra’s dairy products portfolio in the specified markets.

Packaging facility to be explored

Given a2MC is now considering investment in blending and canning capabilities, a2MC and Fonterra have also agreed to explore the potential establishment of a jointly-owned facility as an extension of the arrangements under the NPMSA and to cater for growth.

Development of A1 protein free milk pool

To support these agreements, Fonterra in conjunction with a2MC will progressively develop an A1 protein free milk pool in New Zealand and Australia. This is for the purposes of manufacturing and supplying products to a2MC under these strategic arrangements. It is intended that these milk pools will significantly grow over time to service the agreement.

a2MC CEO Geoffrey Babidge said: “The comprehensive strategic relationship presents a2MC with a range of significant medium and long-term opportunities.”

“The NPMSA will provide a2MC with a highly-credentialed second manufacturer to support the ongoing growth of the Company’s nutritionals business. The Company has been focused on broadening its manufacturing and supply chain options and the NPMSA will provide multi-site and geographic diversification and new product development opportunities. The partnership will also provide access to large scale manufacturing performance and competitive terms within a global context.”

“The Company has been evaluating the best approach to build a meaningful position for a2 Milk™ branded fresh milk in New Zealand for some time. In our view, the relationship with Fonterra is the ideal model to build brand awareness and deliver a consistent high-quality product to the broadest customer base in this market.”

“The opportunity to work together with Fonterra to explore new markets and products is also significant. Fonterra’s resources and capability in many of our new priority markets should provide a basis to more quickly expand distribution of a2MC branded nutritional products. Over time additional markets and products may be added to this initiative.”

Goldman Sachs acted as financial and strategic advisor to a2MC in relation to the establishment of the global strategic relationship. 

This is the statement from Fonterra:

FONTERRA AND THE a2 MILK COMPANY FORM COMPREHENSIVE STRATEGIC RELATIONSHIP

Fonterra Co-operative Group Limited (Fonterra) and The a2 Milk Company (a2MC) have today entered into a comprehensive strategic relationship that links Fonterra’s global milk pool and supply chain, manufacturing capability and in-market sales and distribution capacity with a2MC’s brand strength and capabilities.

As part of the partnership, Fonterra will now begin conversations with its farmers to source an A2 milk pool for a2MC products in New Zealand, which is intended to significantly expand over time to help meet the growing demand for a2MC products. A similar milk pool in Australia will also be developed.

Announcing the deal, Fonterra CEO Theo Spierings and a2MC Managing Director and CEO Geoffrey Babidge said the partnership is designed to generate returns for both companies by growing demand in both local and international markets for products using a2MC’s brand strength and capabilities.

“The partnership is intended to fast-track market growth and this creates opportunity for our farmers to create additional value from their milk,” said Mr Spierings. “Fonterra’s high quality milk pools, our global supply chain, our manufacturing capabilities and knowledge, and our in-market sales and distribution expertise is being combined with a2MC’s brand strength to unlock new opportunities in a wide range of international markets. It is a win-win for both companies.

“We continue to see a strong future for dairy based on our existing range of products, including recent additions such as organic, low-lactose and high protein milk choices that consumers seek out for a premium. The a2MC products promoted by this partnership sit well within our overall portfolio of products.

“Consumers like to have choices and the growth of a2MC branded nutritional powders and fresh milk sales in Australia, for example, shows the potential. This partnership is all about finding ways to continue to delight our consumers and generate more value for our farmers.”

The partnership encompasses:

  • New Zealand and Australian milk pools to support the strategic partnership, and in the first instance the Nutritional Products Manufacturing and Supply Agreement. Fonterra will now begin discussions with its farmers on the best way to source this A2 milk for a2MC products, and share the value it will create for farmers. It is intended that these milk pools will significantly expand over time to support new a2MC products and its new priority markets across South East Asia and the Middle East.
  • Nutritional Products Manufacturing and Supply Agreement (NPMSA) whereby Fonterra will exclusively supply nutritional milk powder products in both bulk and consumer packaged formatsintended for sale in a2MC’s new priority markets across South East Asia and the Middle East. These products will be produced at Fonterra’s facilities in New Zealand as well as Fonterra’s nutritionals facility, Darnum in Victoria, Australia.
  • Distribution and sales arrangements, in respect of a2MC branded products whereby the companies will seek to establish distribution and sales arrangements to assist a2MC’s entry into its new priority markets across South East Asia and the Middle East.
  • Exclusive period to explore a2MC branded butter and cheese, and China sourced liquid milk for sale in Australia, New Zealand and China. These relate to other dairy products not presently marketed by a2MC and would be complementary to Fonterra’s existing portfolio of dairy products.
  • A jointly owned packaging facility will also be explored as an extension of the arrangements under the NPMSA and to cater for growth.
  • A New Zealand Fresh Milk Licence which will see Fonterra hold an exclusive licensing arrangement for the production, distribution, sale and marketing of a2 MilkTM  fresh milk for sale in New Zealand. Fonterra will leverage its substantial fresh milk capabilities to establish distribution across the country.

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22 Comments

Fantastic news. A2 is a $6 billion company started in NZ but looking less and less Kiwi by the day, let's hope joining up with Fonterra will bring some more of the benefits to NZ rather than Australia.

edit: actually, following today's results it's currently an $8 billion company and now the largest company listed on the NZX.

Fonterra and its farmers had a chance but blew it big time, chose to invest in China instead?
"Fonterra also spent years of effort to dispute the science behind A2 Milk – A2 claims its milk, which is free from A1 proteins, is easier to digest.
Fonterra also passed up opportunities to buy A2 before its performance – and value – started to skyrocket."

Earth to A2 ... Warning ! Warning ! ....guys ... Fonterrible will drag you down to their level ... incompetence at every level ... massive pay packages for everyone in head office ....diversification into far flung countries which will haemorrhage hundreds of $ millions , if not $ billions , from your balance sheet ....and a complete failure to innovate ,,,

... other than that ... sweet as butter , mate !

Head Office is located in the farming community of Auckland Viaduct. Those working there are have excellent product knowledge from drinking their regular morning flat whites.

I wonder if it's a decision made by the Fonterra PR machine, we need good news, we want in, what's it going to cost?

Markets liked it. ATM up 24% today.

... the " market " once thought the world of Enron , too ... plus a few hundred dotcom stocks ...

Don't be surprised A2 holders ... if , having gone to bed with a flea ridden mangy mutt , you wake up with an itch ....

With a P/E of 75, how long can it sustain that price? Thought it looked expensive at $7-8...

If they match the first half performance in the second half, their PE will down to the low 40s. That should be a conservative estimate. Still high, but plenty of scope for growth, US is just ramping up, the Fonterra deal opens up new markets and products.

That said, I've definitely thought they were expensive at times and regretfully sold a bunch of my original 60c purchase on the way up.

Selling the health benefits of A2 will be as hard as selling "grass fed".
The whole world can do it if they wish.....

A2 have a bunch of patent protections and are doing quite nicely selling the health benefits in the UK and US, China and Australia already seem convinced. The clinical trial data is still flowing through too.

I know an a2 herd owner whose been waiting literally for years for this from Fonterra. Waiting waiting waiting, last year they'd had enough and sold their herd.
Better late than never I guess.
Where does this leave Synlait the current processor of a2MC product?
A cynic would wonder whether it is simply a ploy to dent Synlait and steal Westland a2 herd owners.

Synlait still supplies the infant formula supply to Aus, NZ and China, responsible for ~3/4 of A2's revenues at the moment. Fonterra will be supplying product to new markets and developing new products, and supplying A2 milk in Australia and China, so in theory doesn't tread on Synlait's toes. A2 have a large shareholding in Synlait (~8%?) so wouldn't want to damage the company, but their growth seems a little too fast and broad for Synlait to keep up with alone.

Agreed on the facts, but it will be interesting to see how the realationships progress. Fonterra is not exactly friendly playmates in the sandpit are they.

An example of the benefits of best practice liberal corporate governance and leadership; Fonterra reacting to consumer demand faster than a speeding bullet.
It gives one hope that Fonterra will wake up to consumer awareness for authentic pasture derived nutrition.

Omnologo,
" authentic pasture derived nutrition" sounds like a line from the dairy farmers song book.
Most humans live off horticulture or cereal crops and rather like them.
The popular meat, if it matters, in the US would have to be grain fed marbled aged beef.
I hope that does'nt disappoint you.

True, it will only fly if consumers want it. However there is awareness about distintive nutritional qualities and differences between products derived from pasture vs. pulses.

Im with you Omnologo, consumers in the States are moving more towards grass fed beef. Corn feeding cattle is a great way to make them fat, you can see it on the backsides of the people. Corn fat is not healthy, Cattle are better on grass fat cattle.
Had to edit because Im a fan of a high fat low carb diet.

I admit I was thinking back a long way to mention marbled aged beef.
I did a quick read and yes, there is interest in grass fed, in association with aspects of local production and chemicals free.
They used to throw out our grass fed beef into the mincers to make their mince patties leaner, I guess that is still happening.

I am noticing the drive for healthy food in Europe and the USA is more and more about locally grown stuff.
The couriers out of Cornwall in the evenings are full of local produce, mussels, lamb, beef, fish veges, fruit all going out in the evening for early morning delivery anywhere in the UK.
I like my black pudding and if I order by 3pm I get it in time for my breakfast next day, and thats from MacLeod and MacLeod in Stornaway, Isle of Lewis. Local producers are getting their act together and bypassing the middle man making it a profitable business, also giving them direct contact with consumer and market driven feedback.

https://www.charlesmacleod.co.uk/collections/puddings

France to make half of all food in public sector organic or local by 2022

https://www.foodforlife.org.uk/whats-happening/news/news-post/france-wil...

We are behind the 8 ball again.
http://somersetlocalfood.co.uk/in-film/

'Half of all food bought by the public sector in France to be organic or locally-produced, or come with a quality label by 2022'
There are a lot of ORs in there