Corporation milks the testimonials
YOU’VE PROBABLY seen the ads.
‘‘I used to be covered in boils, but after smearing my body in Balinese algal blooms my skin glows with health!’’
‘‘My doctor said my cancer couldn’t be cured, but since I learned how inhaling compressed Antarctic whale breath could support my immune system, I haven’t died at all!’’
These are known as customer testimonials – a style often used by marketers who would like to say their products have health benefits, but can’t because the law prohibits making such claims without evidence.
Examples can be found peppered through this month’s Private Placement Memorandum from listed milk marketer A2 Corporation.
‘‘We tried it and I noticed that Ruby stopped getting tummy aches,’’ says one. ‘‘I’ve been intolerant to milk, or dairy, for some time . . . When a2™ milk came out . . . I tried it and had no problems with it,’’ says another.
The disclaimer comes in small print on page 30: ‘‘Consumer testimonials do not constitute a representation by A2C of any claimed health benefit.’’
To be fair to A2, it has more right than many to hint at the healthiness of its products. Briefly, A2 milk is distinct from standard milk because it contains only the A2 form of beta casein protein and does not release a particular protein fragment when digested.
Enough scientific study has been done on A2 milk to suggest proper clinical trials could have useful results – Professor Keith Woodford’s book The Devil in the Milk has a good account of the scientific issues – but it looks like the costs, and risks, have so far outweighed the benefits.
After all, what if you spent a lot of time and money on research only to get negative results? Much better to make no claims at all and sell your stuff to the legion of health-conscious consumers happy to pay a premium for unknown, or even imaginary, medical value.
A2, whose main assets are intellectual property rights covering the identification and use of A2 milk, has therefore thrown in its lot with the quack remedies market – and it has done so to great effect.
On September 4 the company reported full-year profit up 108 per cent to $4.4 million and revenue up 48 per cent to $62.5m. The big contributor to growth was sales of A2 branded milk in Australian supermarkets, where the product was the biggest and fastest-growing in the premium milk segment.
There was also the promise of bigger things to come, with a joint marketing deal in the UK and plans to sell A2 brand infant formula into the burgeoning Chinese market.
A2 shares responded accordingly. Having already doubled to 50c since the start of the year, the shares went on another rampage to 68c, giving the company a market capitalisation of $411m.
From this lofty position, A2’s main shareholders decided to take some money off the table. On December 5 the company announced a private placement to sell 40 million new shares and up to 140 million shares owned by three big shareholders – Australia’s Freedom Foods Group, Cliff Cook’s Mountain Road Investments, and Chicago-based EGI Fund.
The price was 50c a share and the buyers were mainly other institutional investors.
Strangely enough, although the deal meant A2 had $20m more in cash than it had before, the discounted price effectively reduced the market value of A2 Corporation by about $80m.
The biggest seller was Mountain Road, which unloaded 80 million shares for $40m, cutting its stake from 23.3 to 8.9 per cent.
Freedom sold 40 million to reduce its stake from 27.3 to 18 per cent, while EGI halved its stake to 4.7 per cent.
The three have agreed not to sell any more shares until at least 10 days after A2 reports its next full-year result.
In the process, A2 is moving from the NZX Alternative Market to the main board and may qualify for index inclusion as early as February next year.
The question for A2’s other shareholders is whether this deal will boost the share price way beyond 68c in the long run, or whether the controlling shareholders thought the valuation was getting a bit toppy and they might as well take some profit.
I think the answer could involve a bit of both.
Freedom and Mountain Road both say they will invest the proceeds in other operations, which implies those opportunities have better prospects than A2.
However, A2 is projecting revenue of $85m for the year to June 2013, up 36 per cent, while earnings from the main Australia/ New Zealand operation are expected to rise 33 per cent to $11.2m.
That’s good growth and the company thinks it will continue. Revenue from the segment is expected to reach $130m in 2016, while its partnerships in the UK and China should be contributing revenue of $90m and $60m respectively.
With a main board listing and a wider shareholder base, A2 should go on to bigger and better things – always assuming, of course, that consumers don’t lose confidence in its magical powers. Tim Hunter is deputy editor of the Fairfax Business Bureau.