The white stuff
From enfant terrible of the dairy industry to one of its major players, Synlait has used its partnership with Chinese giant Bright Dairy to stake a claim in our lucrative export market
When it comes to dairy, Synlait has always been ahead of the pack. From purchasing and developing a 3,000-head dairy farm in Canterbury in 2000 (it’s still the largest supplying farm in the country), to breaking away from Fonterra in 2005, the company has always had a clear end game in sight.
Specialising in state-of-the-art farming and milk processing, Synlait has managed to throw conventional wisdom to the wind when it comes to dairy farming in New Zealand. Moving out from the shadows of Fonterra may have been risky at the time, but it was a move that paid off. The company posted $11.5m profit for the year to July 2013. It listed in July, with shares peaking at $3.42 (they were issued at $2.20). And it is forecasting a profit of nearly $20 million for 2014 and aims to produce 10,000 tonnes of infant formula in the same year.
A recent partnership with Chinese food giant Bright Dairy is one of the secrets to Synlait’s success. Managing director and chief executive John Penno explains that the relationship was all about being in the right place at the right time.
“We had set up our milk processing plant in 2007, but the global financial crisis struck soon after,” he says. “We wanted to raise credit capital to continue our investment program allowing a move into manufacturing infant formula, and we were looking for an international trade partner.”
Enter Bright Dairy. The Chinese company had been looking to invest in a New Zealand dairy company, which aligned fully with Synlait’s plans. But a misplaced piece of paper meant the initial meeting was slower than it could have been.
“The proposal we sent sat on the wrong person’s desk for a few
‘The team at BNZ picks sectors they’d like to engage with and they go to great lengths
to understand how these sectors work’
months,” says Penno.
Once they were aware of the Synlait proposal, however, Bright Dairy was keen to come on board. An $82 million investment in 2010 secured them a 51 percent share of the company, and a say in most key decisions. But there was also an understanding that Synlait would undertake an IPO in the near future and Bright Dairy’s shares would be diluted.
“When the company was IPOed in July, Bright Dairy’s shares went to 39 percent,” says Penno. “This had been envisaged and captured in the initial shareholder agreement, and has worked out really well for everyone.”
Penno is pragmatic about the risks involved in dealing with an offshore partner. He says that Synlait mitigates risk by having people and systems in place that are the best equipped to handle localised risk – be it in China or New Zealand.
“We choose only to partner with people who understand the risks that may arise in their own countries and are happy to take responsibility for these.”
When it came to negotiating the agreement with Bright Dairy, Synlait was clear that it wanted it to be carried out in New Zealand. The agreement was in English, Bright Dairy representatives came to New Zealand to sign it and New Zealand lawyers were used.
“It was important to us that the agreement adhered to New Zealand laws,” says Penno.
However, the Synlait management team has spent a fair amount of time in China, with the board travelling there at least once a year. Penno says this is an important aspect of their business dealings with the Chinese company, as it enables them to better understand the culture and business thinking of their partners.
Penno feels that it isn’t useful to think of China as a homogenous whole.
“When people ask me for advice developing business relationships in China, I say ‘there is no such thing ’. China has 20 percent of the world’s population and there are so many different cultures within this population. Everyone will have a different experience of the country.”
He says that it is more important to understand the unique market you’re selling to and the culture within the company you deal with.
While a good relationship with partners has been a key to Synlait’s success, so too has its relationship with BNZ.
Anthony Saunders is a client director in institutional banking at BNZ. He says the bank became involved with Synlait when they helped refinance the company in conjunction with Bright Dairy’s involvement, following the tough years relating to the GFC.
“In conjunction with its incumbent bank, Synlait approached us and we immediately saw that they had the vision and drive to succeed.”
Saunders says that Penno has always thought ahead, with new projects constantly on the go. This drive for success and the ‘next opportunity’ is not just quantifiable in monetary terms and is part of the reason that Synlait has attracted global dairy industry participants from China, Japan and Europe as shareholders.
“We recently hosted Synlait at the New Zealand/China Trade Association Awards in May. They deservedly took out the supreme award on the night.”
Penno agrees that the relationship with BNZ has been very beneficial. He says BNZ and its other bank put together a banking deal to support them through the IPO, helped with debt redistribution and met with Bright Dairy to help understand the business more fully.
“BNZ pick sectors they would like to engage with and go to great lengths to understand how these sectors work. They didn’t have to hit the ground running and learn about our industry because they started from a place of understanding.”