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New Zealand extends sway over Aussie dairy industry with Bellamy's deal

New Zealand dairy giant Fonterra is in the box seat to control the future of Bellamy's Organic under an effective "poison pill" arrangement that can be triggered if a shareholder group controls more than 30 per cent of Bellamy's capital.

The troubled infant formula group outlined details on Wednesday of a new arrangement with Fonterra that allows the New Zealand group to terminate a key supply deal if a shareholder group controls more than 30 per cent of the Launceston company's capital.

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Who is Laura McBain?

Bellamy's CEO Laura McBain has been widely credited for transforming the family-run local company to a global brand.

The disclosure, along with news of the replacement of Laura McBain, the chief executive of Bellamy's, by another senior executive, Andrew Cohen, on an interim basis, came as part of a trading update to investors. The update appears to show a continued deterioration of Bellamy's financial position as sluggish sales has led to rising inventories.

The chief financial officer has also been changed as the troubled group reviews all other senior executive positions.

But a focus of Wednesday's trading update is the strengthening of Fonterra's sway over Bellamy's future with the disclosure of the tighter right to terminate supply agreements, which is a clear shot across the bow of shareholder Jan Cameron, who has teamed up with a group of Bellamy's shareholders that she claims may command 35 per cent of the capital to grab control of the struggling company's board via a spill motion to be voted on next month.

Under the deal with Fonterra, the New Zealand company can decide to terminate its deal with Bellamy's if "a person or group of persons [who] acquires 30 per cent or more of Bellamy's voting shares and in Fonterra's opinion ... has effective control of Bellamy's".

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Bellamy's chairman Rob Woolley refused to discuss the revised arrangement with Fonterra, although he did say there had not been any approaches that could lead to a change of control of the company. He also refused to disclose whether the troubled company would need to raise additional equity.

The company has decided to "reset " its approach to China, as it seeks to move away from discounted sales through e-commerce platforms.

"China is hard and a very opaque market. And one of the thrusts of the government is to get a balance of off-line and on-line approaches," he told BusinessDay. "We see what is important is to get reputable product going into the country."

After Wednesday's trading update, Ms Cameron said she had not changed her mind on the need to force through board changes.

"Today's announcement hasn't filled me with confidence," she said. "There's been a breathtaking lack of responsibility on the board's part for what has happened. The announcement today reinforces the need to change the board."

The long-awaited trading update confirmed Bellamy's disclosed it was continuing to struggle to lift sales, with inventories forecast at $105 million to $110 million by June, when it rules off its books, which is well above the end-June level of $67 million.

Bellamy's said it had renegotiated supply contracts with Fonterra and Bega Cheese that include "shortfall payments" if it did not take minimum volumes from these suppliers. The deal with Fonterra, for example, extends the arrangement for a further three years to eight years. Shortfall payments of up to $13 million a year are likely over the next two years.

Bellamy's also said full-year revenue was expected to run at $220 million to $240 million, down from $244 million last financial year, while it signalled impairments might be needed since the shelf life for infant formula was two to three years.

The interim chief executive, Mr Cohen, told analysts the focus was to reduce costs and rebuild cash flow to help to stabilise its finances. Cutting inventories and reviewing raw materials costs formed part of this, he said, with the aim of freeing cash to enable the company to lift its marketing efforts.

Along with the need to guarantee fixed volumes sourced through Fonterra and Bega – or make top-up payments – Bellamy's conceded it had also been hurt by the rising cost of organic milk powder, which it largely sourced from Europe due to the lack of material available locally.

"Increased cost of materials, shortfall payments, and adverse customer mix" were all factors weighing on the group's performance, Mr Cohen told the analysts, adding that Bellamy's was "rethinking its customer strategy".

Industry sources said that while the near term threat to Bellamy's board independence might depend on the push by dissident shareholders to unseat the board, of equal concern to Fonterra was the potential for corporate rivals such as Bega or a2 Milk to make their presence felt on the Bellamy's share register.