Why A2 Milk's become attractive to offshore buyers

A Kiwi milk company's "fall from grace" might be over, as investors rush to buy shares after rumours it might be snapped up by a large multinational.

A2 Milk, which produces infant formula and milk without the A1 protein, has lost two-thirds of its value in the past year - its share price plummeting from $21 in July last year to $6.16 earlier this month. 

On Sunday, Australian media reported Swiss food giant Nestle was interested in buying the company - sending shares up 12 percent in one day. 

"If a foreign company or any investor wants to come and buy the whole of a listed company, it has to be done at a reasonable premium to the share price in order to persuade all of the shareholders to sell," Milford Asset Management portfolio manager Frances Sweetman told The AM Show on Tuesday.

"So when there's rumours of a takeover offer, some people will come in and buy on the anticipation that that takeover offer will be 20, 30 percent higher than the share price."

A2 was a "market darling" until COVID-19 hit, she said. While the share price held up during the early months of the pandemic, it's been almost nothing but downhill since July 2020. Sweetman said although the pandemic will eventually end and the borders reopen, the market clearly doesn't think A2 will ever fully recover - citing changes in Chinese shopping habits.

"They're expecting a 30 percent drop in sales this year. That's due to one of their big sales channels called daigou, which is effectively people buying their infant formula in Australia and carrying it over the border or sending it back over the border in big parcels. With no offshore travellers in Australia… that sales channel has effectively dried up. 

"You would expect that would come back at some point when the borders are open. But there has also been a big shift towards domestic brands in China. Offshore brands like A2 are simply not as popular as they used to be." 

Frances Sweetman.
Frances Sweetman. Photo credit: The AM Show

It's also easier for an offshore company to come up with the $5 or $6 billion it'll cost to buy A2, with interest rates here still higher than many other countries - Switzerland, where Nestle is based, currently has a negative interest rate, making it cheaper to borrow large sums.

"Ultimately if we're going to use some debt funding we have to pay more for our companies, the returns are lower," said Sweetman. "We are at a disadvantage to offshore buyers, and probably always will be."

Any buyout would need to be approved by the Overseas Investment Office, Sweetman said, and the hurdles Nestle will have to leap will be high. 

"You need a large proportion of shareholders to vote and then the Overseas Investment Office approval can be quite onerous. You need to pass a test of good character and also if there's any sensitive land, it becomes even more difficult."