A2 Milk share price falls on shock update

A2 Milk is wanting to give Synlait Milk the boot.

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The A2 Milk Company Ltd (ASX: A2M) share price is on the slide today.

In morning trade, the infant formula company's shares are down 1% to $4.41.

Why is the A2 Milk share price falling?

Investors have been hitting the sell button this morning after the company made a surprise announcement.

According to the release, A2 Milk has given Synlait Milk Ltd (ASX: SM1) written notice cancelling the exclusive manufacturing and supply rights for stages 1 to 3 of its current infant milk formula (IMF) products for China, Australia, and New Zealand. Stage 4 IMF and other products supplied by Synlait are not subject to exclusivity.

In response, Synlait has advised that it is considering the notice of cancellation, it reserves its rights and will respond formally in due course.

However, if Synlait disputes the notice, the matter will be resolved through good faith negotiations, followed by confidential binding arbitration.

The release notes that A2 Milk gave its notice due to Synlait's delivery in full and on time performance (DIFOT) during FY 2023 which fell below the level required to maintain such exclusive rights.

What's next?

In the meantime, the supply agreement between the two parties will remain in place despite the removal of exclusivity. Management expects that pricing terms and other key terms of the supply agreement will continue to apply.

The release also notes that Synlait's exclusivity will remain until any dispute is resolved, assuming it is resolved by the end of 2024.

After which, A2 Milk notes that it will have the option to produce a2 Platinum (English label product) at any facility in the future, including its Mataura Valley Milk (MVM) facility.

However, any positive impact of the removal of Synlait's exclusivity on MVM utilisation and profitability is not expected to have a material impact in FY 2024 or FY 2025.

The A2 Milk share price is down almost 20% over the last 12 months.

Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has recommended A2 Milk. 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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