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Why the Wattle Health Australia Ltd (ASX:WHA) share price has been crushed

The Wattle Health Australia Ltd (ASX: WHA) share price returned to trade with a thud on Monday.

At one stage the fledgling infant formula and health products company’s shares dropped as much as 38.5% to $1.39.

Its shares have since recovered slightly but are still down 20% to $1.81.

What happened?

Wattle Health’s shares returned to trade today after being offline for over six weeks. The company placed its shares in a suspension in early April while it sought to finalise joint venture arrangements with Organic Dairy Farmers of Australia (ODFA) and a potential capital raise.

This has now been completed and this morning management announced a $77.9 million funding package to meet required commitments for the Corio Bay Dairy Group joint venture with ODFA.

The funding package comprises a $20 million three-year loan at an interest rate of 8% per annum with Prospere Advisor Limited, $37.9 million entitlement offer, and a conditional $20 million institutional placement.

According to the release, the $37.9 million 1 for 5 pro rata non-renounceable entitlement offer will be done at $1.25 per share, almost 45% lower than the last close price.

The institutional component of the offer is conditional on the entitlement offer raising at least $30 million. Failure to raise $30 million will result in all funds being returned to shareholders and the cancellation of the joint venture.

In addition to the generous 8% per annum interest rate, Prospere Advisor Limited will also receive 4.7 million options exercisable 24 months from the date of issue with an exercise price of $1.60 as part of the establishment fees for the loan.

What is the Corio Bay Dairy Group joint venture?

The Corio Bay Dairy Group joint venture will design, construct and operate a dedicated organic milk spray drying facility in Geelong, Victoria on land neighbouring ODFA’s existing processing operations.

The cost of construction, including the purchase of land on which the spray drying facility will be located, is estimated at approximately $55 million.

Management believes that it will be a transformational transaction that will see Wattle Health become one of only a few nutritional dairy companies to have access to vertical integration, from the farm to consumer. Wattle Health will have a 45% stake in the joint venture.

Should you invest?

I would stay well clear of Wattle Health right now. While this joint venture could be a success, I think it is a highly risky move. And judging by the price that the money is being raised at and the interest rate on its debt facility, I’m not overly convinced it is adding a lot of value to shareholders.

Instead, I would suggest investors stick to the likes of A2 Milk Company Ltd (ASX: A2M) an Bellamy’s Australia Ltd (ASX: BAL).

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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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