Synutra International, Inc. (NASDAQ: SYUT), a leading producer of nutritional products for infants, children and adults, today announced that it has signed an agreement to sell three dairy farms and two milk processing factories in China. The buyer is Heilongjiang Wondersun Dairy Co., Ltd., which is paying an estimated $28.9 million for the assets.
The sale reflects Synutra’s shift to imported sources of raw milk powder following the September 2008 discovery of melamine in products of 22 Chinese formula producers, including some lots of Synutra’s U-Smart products. Following that incident and the subsequent product recalls, Synutra has been using imported milk powder from Europe and New Zealand in its U-Smart, Super and Helanruniu, or Holsteina series of powdered formula products. Synutra intends to continue using imported milk powder for these series of powdered formula products for the foreseeable future.
The facilities being sold are all located at Junchuan State Ranch in Luobei County, Heilongjiang Province. The three dairy farms, being sold by one of Synutra’s subsidiaries, Heilongjiang Baoquanling Shengyuan Dairy Cow Breeding Co., Ltd., total 147.5 acres. They included one operational farm of 17.3 acres and two farms under construction totaling 103.2 acres. The two milk powder production facilities are being sold by another Synutra subsidiary, Heilongjiang Baoquanling Shengyuan Dairy Co., Ltd. The first is an operational plant with an annual capacity of 7,000 tons of powdered formula. The other is a newly constructed factory with an expected capacity of 15,000 tons of powdered formula. Wondersun is to pay 20% of the total purchase price within five business days after the sale agreement becomes effective. Two later installments, totaling 70% of the purchase price, are expected to be due within the following two months, subject to certain contingencies. The final 10% is due in one year.
Synutra expects to record a loss of approximately $5 million from the sale due to asset impairments, transaction costs and taxes. The proceeds will be added to working capital and will not be recorded as revenue.
CEO Sees Benefit from Streamlining of Operations
“Today’s divestiture reflects our strategy of streamlining our operations and adjusting to the new realities of infant formula production in China,” said Liang Zhang, Chairman and CEO of Synutra. “Our shift to imported sources of milk powder for major product lines after the melamine contamination left us with more domestic production capacity than immediately needed for the foreseeable future. We believe that with this disposition, we have increased our efficiency and optimized our asset utilization. Our remaining raw milk processing facilities located in Zhangjiakou, Luobei and other areas should be adequate for our domestic production needs. Meanwhile, we are hopeful that the working capital gained from this sale will help us to build our market share to levels at or above where we stood before the melamine incident.”
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About Synutra International
Synutra International Inc. is a leading infant formula company in China. It principally produces markets and sells its products under the “Shengyuan” or “Synutra” name, together with other complementary brands. It focuses on selling premium infant formula products, which are supplemented by more affordable infant formulas targeting the mass market as well as other nutritional products and ingredients. It sells its products through extensive, nationwide sales and distribution network covering 29 provinces and provincial-level municipalities in China. As of June 30, 2009, this network comprised over 480 distributors and over 800 sub-distributors who sell Synutra products in over 65,000 retail outlets.
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