The A2 Milk Company Ltd (ASX: A2M) share price is trading lower on Monday despite the release of an announcement.
In afternoon trade the infant formula and dairy company's shares are down 6% to $15.16.
What did a2 Milk Company announce?
This morning the fast-growing company revealed that it has been putting some of its sizeable cash balance to work in the share market. At the end of first half of FY 2020, a2 Milk Company had a cash balance of NZ$618.4 million.
It has now used some of these funds to increase its shareholding in dairy processor Synlait Milk Ltd (ASX: SM1) from 17.4% to 19.84%.
According to the release, the company has taken advantage of its recent share price weakness to acquire shares through on market trades at a price of NZ$4.95 per share. This was below its average entry price for its interest in Synlait.
It was also a big discount to the Synlait's 52-week high. The selloff has hit its shares so hard that this purchase price is 53% lower than its 52-week high of NZ$10.48.
A2 Milk Company's Chief Executive Officer, Geoffrey Babidge, commented: "Following the recent decline in Synlait's share price, we viewed this as an opportunity to complete our strategic holding. Our shareholding reflects the importance to us of our commercial supply arrangements with Synlait."
What next?
Whilst launching a takeover of Synlait Milk would make a lot of sense and support margin expansion, the company doesn't appear interested in doing so.
The release advises that it "has no plans to increase its shareholding in Synlait beyond 19.9%."
What the company does with its burgeoning cash balance in the future, only time will tell. But I suspect a share buyback or a maiden dividend could be potential uses in the next 12 to 24 months.
