Canterbury dairy company Synlait Milk Ltd has admitted it can't get enough support from investors for its planned $150 million float.

Started up by the first big "defectors" from Fonterra's ranks in the South Island, Synlait has scrapped plans to list its production arm on the stock exchange.

It cited a "lack of investor support".

Deferral of an initial public offering (IPO) followed a pre-marketing program to brokers and local and international institutional investors, it said.

"Synlait received strong support for the IPO from local institutional investors and the lead manager but the overall level of support was insufficient to proceed at this time," the company said in a statement to the stock exchange.

First NZ Capital was the lead manager for the offer.

It has indicated the IPO was likely to comprise three parts -- an offer to institutions, to clients of NZX firms and to suppliers and staff.

The offer was likely to comprise a mix of new ordinary shares issued by Synlait Milk and existing ordinary shares sold by Synlait.

Most of the money raised was to be used to build a second milk processing plant on Synlait Milk's existing site at Dunsandel, Canterbury, doubling its capacity to process raw milk into a variety of milk powders for export.

Synlait said it remained committed to its plans and would continue to consider a future IPO, and alternative proposals centred on private capital placements that had been negotiated in parallel.

Synlait has stakes in at least six mid-Canterbury dairy farms within 15km of Te Pirita, between Rakaia and Dunsandel. Of the 80,000 cows which supply the company, 15,000 are company-owned. The Dunsandel plant processes about 1 percent of the nation's milkflows.

At the official opening of its factory last month, the company revealed that it was already close to its maximum processing capacity.

The new capital was needed for a second dryer, to manufacture a new range of products to high specifications.

The company has milk contracts that it has said will grow production to 300 million litres in the next year, and the second drier would almost double the size of the factory and boost processing capacity to 550 million litres a year by 2011.

The site was designed with the flexibility to add a second dryer at marginal cost, but the company had initially expected the demand for higher specification products would be some years away.

It has previously said it wants to create specific dairy products by manipulating the feed of cows.

Some herds may be fed grains to boost the benefits of their milk for consumers' immune systems, brain health, and wound healing.

Others may be fed a diet that blocked a significant amount of cholesterol-elevating fat from their milk.

Mr Penno has claimed links to multi-national manufacturers of functional foods, and 23 percent of Synlait shares are held by a Japanese shareholder Mitsui.

He said the new capital raising would not only enable the company to continue to grow but to reduce debt, "while we manage the risks of growth in the current environment".