Bubs chair misfires in attack on proposed director

Last week the chair of infant formula company Bubs Australia (ASX: BUB), Katrina Rathie, made a scathing attack on requisitioning shareholders seeking to overturn the board, including the false assertion that proposed director James Jackson's last ASX-listed company directorship appears to have been more than five years ago.

James Jackson is currently the chairman of ARC Funds Ltd (ASX: ARC), a boutique funds management firm formerly known as Australian Rural Capital until its name was changed in 2021.

"I have been a director and chairman of that entity since 2014," says Jackson, who noted the company previously had a significant shareholding in Namoi Cotton (ASX: NAM) which was distributed to shareholders in 2021.

The agribusiness veteran was also a non-executive director at Namoi Cotton between 2018 and 2020. Before that he had led a turnaround for Elders (ASX: ELD) to return the group to profitability, and had helped establish a three-fold return on original equity value at MSF Sugar (MSF:ASX) during his eight years there, first as director and then as chairman.

"The statement made by Katrina is manifestly incorrect, factually wrong," Jackson tells Business News Australia.

"I think that it’s very important that a company and a chairperson does actually articulate the facts."

"It's more important in my mind to protect a company, particularly a company like Bubs which has got a brand name. It’s not as though they’re selling coking coal - it's got a brand name with a founder."

Jackson adds he believes the incumbent Bubs board's dismissal of founder and former CEO Kristy Carr, and former chairman Dennis Lin, could have been handled differently.

"The way they’ve gone about this with respect to Dennis and Kristy to me is just quite astounding," he says.

"If it was that they felt this was the time that Dennis should move on from his executive role, I’m sure that there could have been a far more amicable and smoother transition."

Business News Australia has reached out to Bubs' media representatives for clarification from Rathie on the claim regarding Jackson. Rathie was unable to be reached for comment, but a spokesperson noted that ARC Funds Ltd was not included in a one-paragraph biography provided by requisitioning shareholders in a notice of extraordinary general meeting (EGM).

In a statement on behalf of the 'Save Our Bubs' campaign from a group of shareholders including Lin and Carr as well as Chinese distribution partners AZ Global, Jackson alleged that claims about the proposed new CEO Peter Nathan were "misleading and malicious".

In her letter to shareholders, Rathie noted Nathan was the chief executive officer or the Asia Pacific region at A2 Milk Company (ASX: A2M) until his resignation in May 2021, and made statements which Nathan alleges to be misleading.

"A2 Milk is currently defending two shareholder class actions for an alleged failure to meet continuous disclosure obligations and making allegedly false and misleading statements in connection with the deterioration in a2’s sales in China, during the period when Mr Nathan was chief executive officer Asia Pacific," she said.

"Aside from the negative reputational risks to Bubs from appointing Mr Nathan, in the Board’s view, we do not believe he has the right experience to lead Bubs new strategy particularly as it relates to China.

"We note Mr Nathan supported a daigou China strategy at a2 and worked closely with AZ Global Corporation Pty Ltd, part of the requisitioning group. This is similar to the strategy pursued by the Bubs former Chair and CEO, which is the subject of the Board’s strategic review, with necessary changes expected to be implemented to improve shareholder value."

Nathan described Rathie's statement as "desperate and quite bizarre", highlighting the class actions are against A2 Milk and not him.

"I think it’s very malicious and misleading, because the A2 Milk Company board made all the disclosures. I didn't personally make disclosures, so therefore it’s totally inaccurate to point out any individual," he says.

"She talked about reputational risk with respect to regulation, while in fact the total opposite has occurred. Since the class actions were announced, the A2 Milk Company has gained approval from SAMR, which is the Chinese regulatory body for re-registration of infant formula on the 6 June, and also gained approval from the FDA in the US to supply formula on the 3 March."

Nathan explained that he left A2 Milk Company in 2021 after a 14-year stint, and at that time wanted to focus on non-executive roles at two growth companies he had invested in.

"During my period (with A2M) I increased profit from $9 million to $149 million for that particular business unit, which was excluding daigou. The question I would have for Rathie is: Which individual do you know who has actually driven profit by 15x in six years? Who have you identified who has actually done better than what I’ve delivered?" he said.

"I have a very disciplined commercial focus in running businesses, which does both look at tight cost control, and I have a deep knowledge of fast-moving consumer goods (FMCG). I’ve worked in the FMCG industry for my entire life and know channel dynamics and brands in an intimate way, and also I understand what true agility is for an organisation."

In recommending shareholders vote against all resolutions put forward by the Save Our Bubs camp, Rathie pointed to potential vested interests that could emerge if the requisitioners were successful.

"One of the requisitioners is Willis Trading, which owes Bubs a debt of $2.6 million. In addition, Alice Trading, which is owned by the same company as Willis Trading, owes Bubs a debt of $2.9 million," she said.

"These entities have failed to repay the debts despite repeated demands from Bubs. Alice Trading and Willis Trading are affiliated with AZ Global Corporation Pty Ltd.

"Some of the requisitioners have a vested interest in the failed China strategy of Bubs and propose to replace the current independent directors with directors who have pursued similar strategies at other organisations or whose commercial interests may conflict with the interests of Bubs."

She also noted that entities owned and associated with Mr Rupert Soar and his wife have been involved in recently terminated commercial supply relationships with Bubs, "which raises issues in relation to director independence".

Nathan claimed there would be no vested interest with AZ Global as it "will not be the only customer" in China. However, Bubs Supreme was developed for exclusive distribution in China by Alpha subsidiaries Alice Trading Limited and AZ Global.

"There will be a suite of customers that we want to do business with – AZ Global is an important customer, they’re certainly light years ahead  in terms of technology, in terms of reach, in terms of infrastructure, than any other player in the market, so it would be silly for us not to continue to work with them," Nathan said.

The challenger CEO said if he gains leadership he would make the organisation more focused with plans to grow value for retailers and particularly the daigou channels, while also eliminating some activities.

"I still believe the daigou channel has a strong part to play, given the fact that a lot of the dynamics that were in place before COVID are reemerging," he said.

"By that I mean that tourists are coming back, students are coming back in big numbers – they’re the arms and legs of the daigou channel.

"Any brand owner needs to provide a business model that they can take to their networks, and we have an extremely capable partner in AZ Global which has developed technology which wasn’t in existence pre-COVID which they will have implemented and will implement even more strongly with the support of strong brand owners such as Bubs to drive volume, particularly into tier three and four cities."

Dennis Lin said the challenges faced by Bubs in China were industry-wide, including A2 Milk which had notched up more than NZ$100 million in write-offs of stock during the pandemic "because the forecasts of the production were just too difficult to predict".

"We're not shying away from it. In the half-year results you could actually see we spoke about the provision, we spoke about the inventory. None of this is actually news," he said.

"In terms of Alpha’s (AZ Global's parent company) support for this, when when the times are tough you  want the people that understand the business to work it through with you. There’s probably a reason why the suppliers, including Chemist Warehouse, have decided to come out and support us."

Having spent a significant period of time during the pandemic in the US to spearhead operations on the other side of the Pacific Ocean, mainly because COVID restrictions prohibited travel to China but also due to the opportunities present in the US, Lin claims he had put together a "very detailed, granular plan" with Chinese partners to work through the channel inventory.

"We had put together the teams that would actually work together in partnership. I was looking forward to executing that plan," he said.

"Before I was surprised by my removal, I had actually planned to spend most of my time in China and working with the team on the ground  and rolling out this plan, which is really about extending the online-offline, O2O channels, and getting that to truly work, because we have seen already through the early metrics that it was truly working, and we were getting many retailers very interested in our plan."

Lin also made the allegation that Rathie has supported "every single strategy to date" for the past two years.

"The first time I found out she was not in favour of something was the night I got removed. Up until then she supported every single strategy," Lin said.

A spokesperson for Bubs Australia disputed Lin's claim however, stating non-executive directors including Rathie had been "consistently demanding detailed business plans to be produced for China, and for due diligence to be conducted on the proposed manufacturing joint venture in China".

"At no stage was there carte blanche on that aspect of the China strategy at all," the spokesperson said.

"The joint venture was signed off and it was announced to the market, but always subject to the completion of a detailed business plan for the JV."

The Bubs Australia EGM is due to take place on 27 July, 2023.