The Wattle Health Australia Ltd (ASX: WHA) share price has returned from its lengthy voluntary suspension and raced higher on Thursday.
In afternoon trade the health and wellness and infant formula company's shares are up 8% to 81.5 cents. At one stage they were up as much as 13% to 85.5 cents.
Why did Wattle Health's shares jump higher today?
Investors have been scrambling to get hold of the company's shares today after it returned from its voluntary suspension with a positive announcement.
According to the release, Wattle Health has signed a US$75 million debt facility term sheet with Gramercy Funds Management, a dedicated emerging markets investment manager based in the United States.
The debt facility will have a term of 4 years with a coupon rate of 9% per annum and an original issue discount (OID) of 15%. Gramercy will be granted approximately 14.5 million ordinary shares to be held in escrow for the earlier of the term of the loan or prepayment.
Why has the company signed a debt facility?
Wattle Health required funds to complete the purchase of a majority stake in Australia-based CNCA certified manufacturing plant Blend and Pack from Mason Group Holdings for US$55 million. This will bring its holding in the manufacturing plant to 80%.
Management chose the debt facility route to ensure limited dilution to shareholders. The alternative of financing the acquisition via an equity issuance was considered by the company as unnecessarily dilutive to shareholders.
I think this was the right call because I doubt there would have been a big appetite for a capital raising unless it offered a significant discount.
This is because last year the company raised $53.9 million through a placement at $1.25 per share. Anyone that took part in that capital raising is nursing a loss of 35% at present.
Why acquire Blend and Pack?
Blend and Pack is the largest independent, nutritional dairy processing and packaging business in Australia based on volume.
It was one of the first Australian manufacturers to obtain Certification and Accreditation Administration of People's Republic of China (CNCA) and successfully renewed its CNCA accreditation in January.
Subject to SAMR approval for its nominated brands, Blend and Pack is projected to achieve revenue of greater than $31 million in FY 2020 and $59 million in FY 2021.
Wattle Health's chairman, Lazarus Karasavvidis, believes the proposed acquisition is the right move for the company.
He said: "With this acquisition, Wattle Health becomes a fully vertically integrated Australian organic dairy company from our partners in the Organic Dairy Farmers of Australia through to the dedicated organic nutritional spray dryer in Corio Bay Dairy Group – and now the B&P manufacturing plant. We now control the production process such that our products contain the highest quality Australian ingredients, manufactured and packaged to the world's best standard."
Should you invest?
Whilst this is positive news, I would suggest investors stay clear of the company's shares and wait to see what impact the acquisition has on its financial performance over the next 18 months.
In the meantime, I would stick with both A2 Milk Company Ltd (ASX: A2M) and Bellamy's Australia Ltd (ASX: BAL).
