Shares in the a2 Milk Company Ltd [ASX:A2M] are trading higher on the back of a proposed acquisition of Mataura Valley Milk (MVM).
The partial acquisition comes at a critical time for A2M as it looks to secure its manufacturing capacity, particularly for its increasing infant nutrition business.
The A2M share price dropped by 6.36% on Wednesday on the back of its full-year results.
That is despite results being in line with guidance.
The share price has been tracking sideways for some time, though it has threatened to break out recently.
At the time of writing today, A2M shares are up 46 cents, or 2.53%, to trade at $18.62 per share.
A new road into China
A2M plans to make a move down the supply chain by acquiring a majority of MVM.
While nothing has been finalised yet, the deal would see A2M acquire 75.1% of MVM, for a total of NZ$270 million.
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In an announcement today, the company said it was exploring options to participate in manufacturing at MVM’s facility in New Zealand, helping to shore up the supply of its baby formula and milk products.
A2M is currently completing due diligence, though it has the backing of MVM’s majority shareholder, the China Animal Husbandry Group (CAHG).
CAHG would retain a 24.9% interest in Mataura alongside A2M.
With Australia’s relationship with China becoming increasingly strained, the move might also help secure A2M business in China.
CAHG is a wholly owned subsidiary of China National Agriculture Development Group, which is also the parent company of A2M’s strategic partner in China, CSFA Holding Shanghai.
CEO Geoff Babidge had this to say:
‘The potential investment in Mataura Valley Milk’s recently commissioned facility, alongside China Animal Husbandry Group, aligns with this strategic objective as we look to complement and build upon our current strategic relationships with Synlait Milk and Fonterra Co-operative Group, which remain in place.
‘Our intention would be to invest further to establish blending and canning capacity at Mataura’s facility to support the establishment of a fully integrated manufacturing plant for infant nutrition.’
A2M said that discussions are still ongoing, and are not likely to be finalised until the end of FY21.
Where does this leave investors?
The transaction will be entirely funded from existing cash reserves, which stood at $NZ854.2 million as of 30 June.
So, we probably won’t see a capital raising for the purchase.
It marks a strong commitment to future growth from A2M.
Baby formula sales surged nearly 34% to $NZ1.42 billion in FY20, underpinned by strong Chinese demand, with sales in the country more than doubling to $337.7 million.
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