The A2 Milk Company Ltd (ASX: A2M) share price is trading lower today after responding to media speculation.
At the time of writing the infant formula and fresh milk company’s shares are down 2% to $18.19.
What is the speculation?
Over the weekend, The Australian speculated that a2 Milk might be looking to put its hefty cash balance to use with an acquisition.
According to the report, the company could be a frontrunner in the competition to buy New Zealand-based Mataura Valley Milk for NZ$400 million.
Mataura Valley Milk is a nutritional company which sources its produce from one of the finest grass-producing regions in the world – Southland, New Zealand.
Its products include infant and toddler nutritional powders, skim and whole milk powders, and instant fortified whole milk powders. Importantly, it holds a China Food and Drug Administration (CFDA) registration.
Is a2 Milk Company acquiring Mataura Valley Milk?
During the first half, a2 Milk generated operating cash flow of NZ$160.6 million. This left it with a closing cash balance of NZ$618.4 million.
Although some of these funds have since been spent increasing its stake in Synlait Milk Ltd (ASX: SM1), I suspect it will still have well over NZ$700 million of cash on its balance sheet at the end of FY 2020. Which is more than enough to fund this potential acquisition.
However, this morning the company’s CEO, Geoffrey Babidge, was remaining tight-lipped on the speculation.
He responded to the report by confirming that a2 Milk “has had, and continues to have, various discussions with a number of parties in relation to potential strategic options relating to participation in manufacturing capacity and capability.”
The company will continue to keep the market informed in accordance with its disclosure obligations. This includes if and when any such discussions were to reach a conclusion.
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Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of A2 Milk. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.
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