ATM - A2 Milk Corporation Limited

[nextbigthing]

It’s been suggested previously that Fonterra or some other mainstream milk producer might want to take over a2MC in order to market A2 Milk as an alternative to standard milk for consumers, especially those who experience digestive discomfort from drinking normal milk containing A1. The theory is that this might allow the buyer to gain a market niche and to some extent limit the damage to mainstream milk caused by the A1 debate.

This scenario has its surface attractions, but it would involve a raft of difficulties.

For a start, it could not be done without acknowledging that the BCM7 peptide generated by A1 milk presents health problems. Not something the mainstream industry wants to do, certainly not Fonterra which is on record as rejecting the the A2 proposition as scientifically flawed.

According to Prof Woodford’s book “Devil in the Milk”, Fonterra is said to have a fallback strategy that it could adopt if necessary to confront A2. But he notes that Fonterra sees A2 as a risk rather than an opportunity for the NZ dairy industry, which he says “seems a huge pity”.

This position could only change if Fonterra did a major scientific back-flip. Of course nothing is impossible, and the scientific evidence against A1 beta-casein is certainly going to increase the pressure – in fact it is building up already in a quiet way that doesn’t get attention in the media.

But there are problems.

1. The takeover cost: a2MC’s market capitalisation is currently close to $400m and likely to increase, especially if there is takeover talk. Would it be worth it just to offer an alternative digestion-friendly niche product at a steep premium price that will always deter the majority of consumers? Even if consumers know that A2 milk is better for them, most of them won’t understand why and will continue buying the standard A1-contaminated mix at half the price.

2. Converting output to A2. There’s a difficult decision to be made – is it intended that A2 would just be a niche line, or would it be pushed to become a mainline product? It’s not too hard for a few dedicated farmers to create pure A2 herds for a relatively small player like a2MC by swapping their unwanted A1 cows for A2 ones, as some have already done in NZ, Australia, Britain and the US, but larger-scale conversion is another matter. It would take years. NZ is actually well placed to do it, as most of its breeding bulls are already pure A2, but it would take a lot to convince debt-ridden farmers that converting their herds to A2 is an appropriate idea at this time. It would involve significant loss of production as they cull their A1 cows, and extra work in managing split herds in the milking sheds.

3. Political considerations. Farmers who decided against switching to A2 would object to A2 being promoted as “safer” and more “consumer-friendly” than their product and meriting a premium price. There’s no sign of a desire by grassroots Fonterra suppliers to convert to A2 although a small handful are doing so. Fonterra’s commercial decisions are made by a board of directors elected by its farmers at large, and will reflect broad farmer sentiment.

4. Economic damage. One of the main reasons Fonterra opposes the A2 hypothesis is that it is based on the assertion that standard milk presents health risks. If Fonterra were to adopt the A2 line, it would effectively be announcing to global consumers that it has concluded standard milk is risky. Remember Sanlu, melamine, and the botulism scare and the economic and reputational damage these affairs caused Fonterra. There would be a costly global consumer backlash against Fonterra products, reducing NZ’s dairy income while other producers such as Nestle would of course mount campaigns defending the safety of their products. It would be incredibly hard to spin such a decision in favour of NZ’s dairy production.

5. Scientific advances. Just as the global public eventually came to realise that smoking can be lethal, the links between A1 milk and medical problems such as autism, diabetes, heart disease and cot death will gradually become more widely recognised. A dairy producer would need a clever strategy indeed to manage this market dilemma. At present they all choose to just ignore it, knowing that food safety authorities in NZ, Australia and Europe still continue to say incorrectly that it’s not an issue. It will become an issue.

Any dairy outfit contemplating a takeover of a2MC would have to have a well-thought-out plan as to what to do with it.

That’s not to rule out some offshore dairy operators adopting A2 Milk as a niche product, but I think not by means of a takeover. There are people in the industry who buy the A2 proposition and see merit in offering it as a premium specialty. But this could be done under licence. Interestingly, the current chairman of Dairy UK, the British dairy industry organisation, is actually a member of a2MC’s British board and a supporter of A2 as a niche player in the market. That seems to make more sense.

Thanks for a well thought out reply NT001. I disagree with a major assumption you're making however.

You say that by aquiring A2 and selling it themselves, Fonterra would be admitting regular milk is bad. That's not true. Is a supermarket that sells organic vegetables admitting that 'normal' veges are bad? No. They're just offering a premium product for those who want it. Now imagine that supermarket chain having the exclusive rights to organic goods. The concept is similar.

You also mention the $400m MCap. Sure, but they're aquiring the current company with all the cashflows etc with it, as well as the IP. You could argue it's a no brainer as the company eventually pays for itself and the IP is free!

A simple option for someone like Nestle would be to continue to run it as a separate company in the eyes of the public (therefore not having to admit their standard product is bad) however lever the existing distribution networks etc.

Anyway, if the shareprice stays down here, MAC, Seeweed and myself will soon be announcing our combined takeover bid.

Good debate anyway. Much better than that circus on the PEB thread. Cheers, NBT

[NT001]

Thanks for a well thought out reply NT001. I disagree with a major assumption you're making however.

You say that by aquiring A2 and selling it themselves, Fonterra would be admitting regular milk is bad. That's not true. Is a supermarket that sells organic vegetables admitting that 'normal' veges are bad? No. They're just offering a premium product for those who want it. Now imagine that supermarket chain having the exclusive rights to organic goods. The concept is similar.

You also mention the $400m MCap. Sure, but they're aquiring the current company with all the cashflows etc with it, as well as the IP. You could argue it's a no brainer as the company eventually pays for itself and the IP is free!

A simple option for someone like Nestle would be to continue to run it as a separate company in the eyes of the public (therefore not having to admit their standard product is bad) however lever the existing distribution networks etc.

Anyway, if the shareprice stays down here, MAC, Seeweed and myself will soon be announcing our combined takeover bid.

Good debate anyway. Much better than that circus on the PEB thread. Cheers, NBT

Thanks NBT. Of course nothing's impossible. A while back, I was worried stiff that a cheap takeover was in the wind and this was the reason someone was manipulating the SP downwards. But then I went through the analytical process outlined in my over-long post, and concluded it wasn't on.

I disagree with your organic analogy, as no one is saying "normal" veges are "bad", whereas the evidence against A1 is mounting. And I think some of the other factors I mentioned need addressing. Why buy the company when you could offer a premium product under licence without taking on all the other problems?

Good luck with your combined T/O bid!

[nextbigthing]

Fair enough,

What did you decide the shareprice slide was down to? Purely just the market revaluing to fair value in your opinion?

Cheers

[NT001]

Fair enough,

What did you decide the shareprice slide was down to? Purely just the market revaluing to fair value in your opinion?
Cheers

No, it has looked to me as if there is a deliberate attempt to set the price at a certain level, which doesn't look like leaving market forces to play out naturally to find a "fair value".

[nextbigthing]

No, it has looked to me as if there is a deliberate attempt to set the price at a certain level, which doesn't look like leaving market forces to play out naturally to find a "fair value".

I agree. But if not for a takeover, then why manipulate the shareprice down?

(edit; I appreciate it would make capital raising harder but I doubt someone would spend all that money for this)

[kizame]

Personally I don't think anybody is manipulating the share price.(for takeover that is,just normal traders trying to buy at the cheapest price)
The weakness comes down to the dairy prices in my opinion and the downturn the industry is going through,it can't help but rub off on ATM.
Remember there are lots of shareholders and potential shareholders who don't have the expertise and knowledge that some of you guys do,they see that company selling milk and dairy prices are down,the whole negative roll on effect from the media.
Who cares anyway,if your conviction is the company will be a huge winner,buy more.

[NT001]

I agree. But if not for a takeover, then why manipulate the shareprice down?

Very good question, to which I don't have a real answer. That's why I've been giving the whole issue a lot of thought. So is it you, MAC and Sweeweed manipulating the price? Remember, my minimum asking price is $1.50. Can you meet that?

If there's a potential T/O (other than yours) it's always seemed to me the most obvious logical candidate might be Perich in Australia. He's loaded, is very much involved in a2MC already, has a very big A2-only dairy farm, is looking to expand heavily into selling dairy into China, and controls Freedom Foods which already has a big stake in a2MC and is "clean" already as far as the A1 problem is concerned. I'd be curious to know if there's any way to monitor his transactions as I gather Australian investors are not subject to NZ reporting rules . I see more logic in him trying to take over ATM than in it being done by one of the big players like Fonterra, Nestle etc, and fewer problems.

[winner69]

?....might be Perich in Australia ......... I'd be curious to know if there's any way to monitor his transactions as I gather Australian investors are not subject to NZ reporting rules .......

I believe they are.

[nextbigthing]

So is it you, MAC and Sweeweed manipulating the price? Remember, my minimum asking price is $1.50. Can you meet that?

Hey MAC, Seeweed, their expectations are still too high, they want $1.50. We'd better hammer it down some more. What say we get it to high fourties and try again. Get on to the PR guys and have them release some article that A3 has been discovered and is better than A2 or something.

[see weed]

Hey MAC, Seeweed, their expectations are still too high, they want $1.50. We'd better hammer it down some more. What say we get it to high fourties and try again. Get on to the PR guys and have them release some article that A3 has been discovered and is better than A2 or something.

I'm happy with sp at the moment. As I have said before, just keep topping up as it goes down. Have done 21 top ups in 5 months and 6 sell offs. Haven't checked sp today but would buy more if sp drops. I don't think Milford will sell me their 90 odd million for a take over, they would not accept my offer.