Beingmate blames Fonterra for its losses

Updated

Baby formula tins on shelves at a supermarket in Shanghai in December 2016. Beingmates brands were conspicuously absent from the shelves. Photo by Lynn Grieveson.

Beingmate, Fonterra's troubled investment in China, is blaming the co-op for its losses, according to a formal letter Beingmate has reportedly sent to Chinese financial regulators in response to their enquiries.

The letter indicates a further deterioration in an already toxic relationship between New Zealand's biggest exporter and its biggest play in New Zealand's biggest export market. It also highlights the risks that Fonterra may have to write off more than $500 million from its investment in a company that Chinese officials are investigating.

The letter was disclosed in a recent article by Beijing News. It said it had a copy of the letter and quoted from it, as translated from Mandarin by one of Newsroom's researchers:

"Due to a variety of reasons (most of which are caused by Fonterra), Beingmate had a sharp decline in operating performance, and encountered business difficulties. It has come to a point that the two parties could not reach agreement, which is seriously affecting the company's business operation and development," Beingmate was quoted as telling the China Securities Regulatory Commission.

The Beijing News said that at the time of publication neither Beingmate nor Fonterra had responded to its questions about the letter and the business dealings between the two parties.

Six hours after Newsroom's put questions to Fonterra about the report, the co-op replied that "Beingmate has not provided a submission" to regulators. It noted Beingmate's forecast earnings downgrade last week outlined four factors that have driven its recent losses but it did not mention Fonterra.

  • Intense competition and heavy discounting that has followed in the wake of new infant formula regulations in China.

  • Costs resulting from the purchase agreement for products from Darnum, the Australian milk powder plant the two companies own in a joint-venture.

  • Higher levels of inventory write-off more than originally expected.

  • Less accounts receivable payments than anticipated.

Fonterra's reply, however, highlighted how poorly Beingmate was performing. In particular, the burden of the Darnum joint venture is likely exacerbating the long-standing conflicts within senior Beingmate management about sourcing powders from abroad. These tensions were detailed in a Harvard Business School case study on the company.

The latest public disagreements between the two partners began on January 21 when Beingmate issued a downgrade to its earnings forecast for the year ended December. It said it expected a loss of yuan 800m - 1bn ($171m-$214m), more than double the loss it had forecast in October. It also advised it was in danger of being delisted from the Shenzhen Stock Exchange because of its continuing losses.

On January 22, Fonterra responded with an announcement saying it was "extremely disappointed" by Beingmate's announcement. It was the first public rebuke of Beingmate in their relationship which began in 2014.

Fonterra also said that "four Beingmate directors, including the two directors designated by Fonterra, have expressed reservations relating to some aspects of Beingmate's financial management and reporting practices."

The same day, the Zhejiang bureau of the China Securities Regulatory Commission issued a regulatory letter to Beingmate, requesting the company to provide information on its performance and the decisions of its directors.

Zhejiang, south of Shanghai, is Beingmate's home province. The company is headquartered in Hangzhou, a highly prosperous city renowned for its technology companies. There are reports in China that the city government of Hangzhou is offering to mediate between Beingmate and Fonterra.

According to one interpretation of events by some media in China, Fonterra is seeking to take over Beingmate. The co-op has vigorously denied this.

The speculation is persistent, though. A report overnight suggested that Beingmate's third largest shareholder, JVR International, which has a 4.81% stake in the company, was aligning with Fonterra in its dispute with Beingmate.

Together the two companies have 23.61% of Beingmate, while Beingmate Group, its privately-held parent company, had a 34% stake, according to a regulatory disclosure in November.

Beingmate Group is controlled by its founder Xie Hong, who calls himself Sam in English. Theo Spierings, Fonterra's chief executive, has often cited his relationship with Xie as crucial to the links between the two companies.

Fonterra bought its 18.8% stake in Beingmate in March 2015 at yuan 18 a share for a total cost of $750m. But Beingmate has consistently failed to meet Fonterra's publicly expressed hopes for their business relationship.

Beingmate's shares traded at yuan 6.70 the day before it announced its latest forecast. They have since fallen to yuan 5.31. If Fonterra marked its investment to Beingmate's current share price, the co-op's farmer-shareholders would take a $525m loss.