ASX-listed Bellamy’s Australia plans to raise A$60.4 million from shareholders and will pay nearly half of that to New Zealand’s Fonterra Cooperative Group in order to change their milk supply contract in its quest to comply with Chinese import regulations.

The two companies have been in negotiations this year after announcing changes to their take-or-pay organic powder contract. Fonterra and Bellamy’s first entered into a five-year, multi-million dollar deal to manufacture a range of baby nutritional powders at the Darnum infant formula plant in south-east Victoria in November 2015.

The Australian company then ran into trouble in China in 2016 when that country tightened its infant formula regulation, allowing each legal entity just three brands with three recipes for infant formula. A further challenge came from a regulatory requirement that any Chinese labelled product will require registration from the China Food and Drug Administration (CFDA) from 2018.

In a release to the Australian Securities Exchange today, Bellamy’s announced a five-for-38 entitlement offer at A$4.75 per share, allowing it to raise A$60.4 million. That’s a discount to the A$5.76 price the shares were halted at pending the announcement.

Bellamy’s said the net proceeds of the offer would be used to “further reset the company’s supply agreement with Fonterra”, including an A$27.5 million payment to Fonterra in exchange for it removing projected shortfall payments over the life of the supply agreement. A$28.5 million will be used to buy most of Camperdown Powder, a canning facility with a record of compliance with Chinese regulations.

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