A2 Corporation joins the big boys

Despite my long-held views about beta-casein, and the importance of converting dairy herds to produce beta-casein that is of the A2-type, I typically avoid commenting on the commerce of A2 milk. My hesitation stems from concern that people might incorrectly think that my commentary could be influenced by commercially sensitive information that is not in the public arena.

Despite that reticence, recent announcements from A2 Corporation  are sufficiently momentous that I have decided to contribute some words on the commercial developments.  In doing so, I want to make it clear that this post, and any other material that I might write on A2 milk, never depend on confidential information.

This week, A2 Corporation has shifted from the alternative NZAX Board to the  NZX Main Board. It has been clear for some time that the company had outgrown the NZAX Board, which  is for small developing companies, and the time had come to make the shift. The only real question was whether or not a dual listing should be sought on the Australian Stock Exchange. That has not occurred. Further down the track, another option might well be to dual list on the Hong Kong Exchange.

Over the last two years the shares in A2 Corporation have had spectacular growth in value. Two years ago they were bouncing around between 8 and 9 cents. Early this week, before a temporary trading halt was called, they had risen to 68 cents. However, on relisting on 7 December the shares dropped to a range of 52-54 cents. More on that later.

A2 Corporation Share Price. (Source: NZX)

The capital value of the company  has been growing even faster than the share price. This is a result of additional share placements. Two years ago, the capital value was about $NZ25 million. At the start of this week it was over $NZ400 million.

The shift to the NZX Main Board  has been contemporaneous with a share restructure. There has been a private placement of 180 million shares at 50 cents, with 140 million of these shares being traded for existing shares of the three  major shareholders, plus 40 million new shares. This gives A2 Corporation another $20 million in cash  to develop its strategic initiatives in various parts of the world.

The way in which  A2 Corporation structured the new share placement seems unusual. There was no rights issue to existing shareholders. Rather, there was an announcement that additional shares could be applied for, but with only 24 hours to make that application. The price of these new shares was fixed at 50c, which was a considerable discount on the most recent traded prices of around 68 cents.

When share trading re-commenced on 7 December, the trade price ranged from  52-54 cents. Presumably some of the prior shareholders would have been more than a little disappointed to see their shares decline in value so much from earlier in the week as a consequence of events brought about by the company itself.

It would be interesting to hear the thinking behind the decision to price the shares at 50c. My assumption is that some of the existing shareholders were very keen to cash  up part of their existing investment, but the potential institutional investors needed for this volume of shares had signalled an unwillingnes to pay the current market price.

A stated benefit from the sale of shares by the three major existing shareholders has been to create more liquidity in the shares. This need for increased liquidity is unlikely to have been a pre-condition for listing on the NZX, but it may have been a pre-condition for being included in the NZX50 Index.

The expectation is that, early in the New Year, A2 Corporation will formally become part of the NZ50 Index, i.e. one of the 50 major companies on the stock exchange.  There are a number of investment funds which have a policy of investing in all companies on the NZX50, and in this way they link their fund return to the index return.  Accordingly, this will create additional investor interest beyond that which would have occurred in any case from the higher profile associated with the Main Board.

Currently, A2 Corporation has only one market where they are profitable. That market is Australia where A2 now claims a 6.8% market share by value of milk sold in supermarkets  and similar stores. These sales have increased tenfold over a 5 year period from September 2007. In the most recent 12 months through to September 2012, sales increased close to 50%.

Back in 2007 the A2 business was indeed in some difficulty and the company was in danger of being delisted from the major supermarkets.  A2 Corporation publicly credited the turnaround in late 2007 to the impact of my book ‘Devil in  the Milk’, first published at that time, which focused on the health risks associated with A1 beta-casein. The A2 milk sales increased by 68% in the following quarter.

A2 Corporation have themselves not been able to make the claims that I did in my book, as it would be illegal to do so in advertising. But through a combination of sophisticated marketing linking the A2 product as a solution to milk intolerance, together with good exposure on public affairs programs, the ongoing growth has been both spectacular and sustained. They have also been highly successful in getting their message across to health professionals, including both doctors and nutritionists.

A2 Corporation has now published SKU (stock keeping unit) data for Australia showing that in October 2012 their full cream product was the 19th highest supermarket SKU. Eight of the higher rating SKUs are various formulations and packagings of Coca Cola. Nescafe has two of its coffees in there, and Tim Tams also are on the list. All of these are still above A2 milk, but in the milk category, A2 is Number 1.

The A2 milk category now exceeds the combined total of all organic, lactose free, goat, and soya milks.

The challenge for A2 Corporation is now to repeat their successes elsewhere, starting with fresh milk in the United Kingdom. A2 milk has been available since October 2012 in some 700 UK supermarkets (Tescos, Morrisons and Budgens), with more supermarkets coming on line in the New Year.

There will soon also be A2 infant formula on sale in China, with market entry planned for June 2013 using A2 milk sourced from Synlait in New Zealand.  I take some satisfaction from seeing  Synlait and A2 Corporation now working together in this way, having first introduced the respective CEOs to each other back in  January 2011.

However, I spend considerable time in China myself (my first of many visits was in 1973, and with four visits in the last 12 months) and I am well aware of the challenges of establishing the brand in that market. I think it will be difficult for A2 Corporation to get the market penetration that they need  unless they can tell the Chinese market that exactly the same product is available in New Zealand and Australia.  Chinese consumers are very knowledgable, and they do not trust specialist products from overseas that are not also sold in the home country of manufacture. They will quickly get online and check it out. (Middle Class Chinese now spend 44% of their leisure time online!)

A2 Corporation has also flagged their interest in marketing UHT (ultra heat treated) milk in China. I think such an initative would sit nicely alonside the infant formula initiative. Most milk sold in Chinese supermarkets is UHT which means it does not need to be chilled during transport and has a shelf life of at least 6 months.  But the question remains as to whether the additional $NZ20  million of cash that they now have in their war chest will be enough for such an initiatve.  Establishing a brand in China is going to be expensive.

Readers wanting to further explore the potential health benefits of A2 milk should go to the ‘A1 and A2 milk’ category on this website ( https://keithwoodford.wordpress.com).  To me, the risks associated with A1 milk are well defined.  However, the mainstream industry remains more than a little hostile, seeing A2 milk as a risk rather than an opportunity.  And this mainstream industry has a very powerful and sophisticated ‘PR’ machine.

I had hoped that by now we would have seen some definitive research to finally end the A1 versus A2 debate.  However, short term trials can never provide answers on conditions that in many cases take years to develop. So at this stage the issue of A2 milk remains controversial. There is lots of evidence, but still more is needed to counter the mainstream opposition.