Synutra International, the Chinese-based nutrition group, has signed an agreement to sell three dairy farms and two milk processing facilities in China.

The buyer, Heilongjiang Wondersun Dairy Co., is paying an estimated US$28.9m for the assets, Synutra said yesterday (9 September).

The sale, Synutra said, reflects its shift to imported sources of raw milk powder following the September 2008 discovery of melamine in products of 22 Chinese formula producers, including some of Synutra's U-Smart products.

The facilities being sold are all located at Junchuan State Ranch in Luobei County, Heilongjiang Province. The three dairy farms, being sold by Synutra's subsidiary Heilongjiang Baoquanling Shengyuan Dairy Cow Breeding Co., totals 147.5 acres. They include one operational farm of 17.3 acres and two farms under construction totalling 103.2 acres.

The two milk powder production facilities are being sold by subsidiary Heilongjiang Baoquanling Shengyuan Dairy Co. One is an operational plant with an annual capacity of 7,000 tons of powdered formula, the other is a newly constructed factory with an expected capacity of 15,000 tons of powdered formula.

Wondersun is to pay 20% of the total purchase price within five business days after the sale agreement becomes effective. Two later instalments, totalling 70% of the purchase price, are expected to be due within the following two months, subject to certain contingencies. The final 10% is due in one year.

Synutra expects to record a loss of around $5m from the sale due to asset impairments, transaction costs and taxes. The proceeds will be added to working capital and will not be recorded as revenue.

"Today's divestiture reflects our strategy of streamlining our operations and adjusting to the new realities of infant formula production in China," said Liang Zhang, chairman and CEO of Synutra. "Our remaining raw milk processing facilities located in Zhangjiakou, Luobei and other areas should be adequate for our domestic production needs. Meanwhile, we are hopeful that the working capital gained from this sale will help us to build our market share to levels at or above where we stood before the melamine incident."