Westland Co-operative Dairy Company (Westland Milk) is to be sold to China's largest dairy producer Yili for $588 million in a move that will strengthen the acquisitive Chinese company's position in New Zealand.
The deal, to be consummated through a scheme of arrangement, is set to be voted on by shareholders in early July. Under the terms of the deal Westland's farmer suppliers will be guaranteed to get a farmgate milk price that at least matches that paid to Fonterra farmers for the next 10 years.
This arrangement would be very attractive for Westland's farmer shareholders given that Westland has struggled to maintain similar levels of farmgate milk price to Fonterra in recent seasons.
The deal follows Westland putting the business up for strategic review last year, with chairman Pete Morrison saying then that shareholders had clearly indicated support for a plan that would create higher returns and shareholder value, "which would likely require significant new capital".
In the year to July 2018 Westland reported revenues of $692.6 million and a profit of $560,000.
Yili has been in New Zealand since 2013, when it acquired Oceania, the South Canterbury-based dairy company. Since that time it has invested RMB 3 billion (approximately $650 million) in establishing milk powder, infant formula and UHT production lines for Oceania. In recent years it has provided its supplying farmers with a payout higher than the average industry payout. Yili is China's largest dairy producer with an estimated 22% market share.
Total revenues of Yili in 2018 were RMB79.553 billion (about NZ$17.3 billion on Tuesday's exchange rate), and net profit attributable to shareholders of the company was RMB6.440 billion. Both revenues and net profit maintained growth as compared with the previous year.
As some means of comparison, our own giant Fonterra had revenues of $20.438 billion in its last financial year - but of course made a loss of $196 million. Fonterra's reporting its half-year 2019 results on Wednesday.
Westland said the conditional sale agreement was for $3.41 per share for the 72 million Westland shares outstanding, while Yili would also assume net debt and other liabilities totalling $342.5 million - giving a total enterprise value for the business of $588 million.
Morrison said on Tuesday the board believed that the proposed transaction represented "the best available outcome for our shareholders" and the acquisition price was "attractive" relative to Westland shares’ nominal value of between 70c and $1.50.
He said under the proposed transaction the shareholder farmers who are existing suppliers upon the implementation of the scheme will receive the benefit of Westland’s (under the new ownership) commitment (guaranteed by the Yili subsidiary buying the business) to collect milk and pay a competitive payout of a minimum of the Fonterra Farm Gate Milk Price for 10 seasons from the season commencing 1 August 2019.
"A Supplier Committee comprising five representatives from existing Westland suppliers and five representatives from Westland (under the new ownership) will be formed to maintain communications and transparency between existing Westland suppliers and Westland going forward,” Morrison.
Westland said it had confidentially engaged with over 25 parties in a competitive process to seek indications of interest in a cornerstone investment in Westland or a full acquisition or merger with Westland. The board then shortlisted a small number of parties to participate in detailed financial, legal and operational due diligence and to review and negotiate potential transaction documents with Westland.
A detailed shareholder booklet containing information relating to the proposed transaction, the Independent Adviser’s report, the reasons for the director’s unanimous recommendation and shareholder meeting information is currently expected to be provided to our shareholders in mid June 2019. Westland will also hold farmer consultation meetings to discuss the proposed transaction and information provided to date.
“We will also brief staff, customers and key stakeholders on the deal,” Mr Morrison said.The proposed transaction will be by way of a scheme of arrangement and requires the approval of 75% or more of the votes of shareholders (in each interest class) who vote; and more than 50% of the votes of all shareholders entitled to vote (whether or not actually voted).
The proposed transaction also requires High Court approval of the transaction in accordance with section 236 of the New Zealand Companies Act, consent under the Overseas Investment Act, and completion of other customary conditions.