Monday, 11th July 2016
As we commence the new financial year, I can’t remember a more politically unstable time. Whilst the election result is now known, the fall-out from Brexit continues to impact global investor confidence, and domestic and global growth remains sluggish despite record low interest rates and Government fiscal stimulus.
However, the bright side is that we have seen M&A activity increase markedly over the last 6 months and the outlook is positive. Valuations of private businesses are at relatively high levels, driven by ASX listed company multiples and low interest rates. Corporates are seeking acquisitions as a means to accelerate growth and drive economies of scale. Private Investors are seeking opportunities that can deliver attractive risk adjusted yields and assets that are uncorrelated to global market volatility.
M&A Partners have recently worked with several food and agriculture companies, assisting them with their M&A and corporate strategy. We have prepared this newsletter to share some of the key insights we have gained through these various assignments and provide a general update on our activities.
Current M&A Partners Activity
Buderim Group (ASX:BUG)
Buderim Group Limited is one of the world’s leading ginger producers and is a major processor and marketer of macadamia nuts through operations at Agrimac in NSW and Macfarms in Hawaii. M&A Partners have been engaged by Buderim Group to assess strategic options to improve its capital structure.
Modern Baking Company
Modern Baking Company is a large biscuit and baked goods manufacturer, with brands such as Anzac and Unibic. Modern Baking currently operate out of a large state-of-the-art factory in Broadmeadows, and M&A Partners are working with Modern Baking to identify a strategic partner to facilitate sustainable growth in the future.
Ferguson Fisheries & Australian Seafood Quota
Over the last 6 months M&A Partners have worked with Ferguson Fisheries to develop off balance sheet funding structures for the sale and leaseback of Australian seafood quota. Ferguson Fisheries are one of Australia’s largest diversified Lobster processors and exporters.
The market value of Australian (wild caught) seafood quota is estimated at over A$2 billion and its ownership profile is predominantly private. Lease yields for quota are c.7% – 9% p.a. and provide an attractive opportunity (in an uncorrelated, alternative asset class) for private investors. Contact Antony Lynch firstname.lastname@example.org for further information.
Dryen Australia Pty Ltd
M&A Partners recently acted for the vendors of Dryen Australia in the successful sale of the business to Shanghai Yi-Yuan Enterprises, a Shanghai based diversified products group that owns Moran Furniture in Australia. Dryen is a second generation, 40 year old company that is well respected in the Australian textile industry as an innovative design company.
Over the last 12 months we have continued to undertake advisory assignments in the Healthcare sector. This has involved advising a Melbourne based NFP on investment in disruptive early stage businesses in the ‘At Home Care’ sector as well as assisting privately owned care businesses find strategic investment partners.
The At Home Care sector is undergoing significant change with the introduction of Consumer Directed Care (CDC) and individual reporting requirements for care providers and increased regulatory oversight. Additionally, these changes are now coming through into the Disability sector in early 2017 and we expect that the pricing and margin pressure from Government funding (via the NDIS) and increased service level demands from care recipients will cause some private and NFP businesses to seek M&A solutions via sale, acquisition or mergers.
After 8 years together, Mark Hardgrave, a founding partner in the firm, has decided to pursue private interests. Mark became non-executive in December 2015 and we wish him well for the future.
Paul Nemets was promoted to Associate effective 1 July 2016. Paul started as an Analyst 18 months ago and has been a key resource in our FMCG advisory roles.
Matt Perrott joined us late last year as an Intern. We are delighted that Matt has continued on a part time basis whilst he completes his Commerce / Engineering degree at Melbourne University.
Key FMCG Trends and M&A Activity
As companies seek to capitalise on changing consumer preferences, and the increased demand from Asia for Australian products, there is an increasing trend to consider bolt-on acquisitions, leading to increased M&A activity. Through our work in the food sector, we’ve identified some keys trends that drive M&A activity.
Acquiring brands for growth into overseas markets
Unique Australian food brands are garnering an interest from large players as the overseas demand for genuine Australian food products stays strong. Companies are willing to pay substantial premiums to acquire leading brands in the sector to get access to a portion of this demand.
- Kailis Bros acquired by Legend Holdings. The Hong Kong listed conglomerate took a 90% stake in the Western Australian seafood business, Kailis Bros. Legend Holdings already has an agricultural arm in China and has a strong interest in the food production and export market in Australia. The value of the transaction was undisclosed.
- Botanical Food Company, owner of Gourmet Garden, acquired by McCormick & Company. Gourmet Garden is a Queensland based agribusiness company specialising in herbs and spices. McCormick plans to bolster export operations and increase product penetration in North America. The transaction was closed at $150m, 12x EBITDA.
Acquiring strategic capacity
Companies are looking to acquire manufacturing capabilities to either establish an initial production capacity in the Australian market or to expand on existing operations.
- Yarra Valley Snack foods acquired by Tyrrells in August 2015. Tyrells is a UK based chip company looking to expand operations across Asia, and this acquisition provides them with a strong base for growth. The Yarra Valley site is the first place outside the UK to make Tyrrells crisps.
- Universal Robina Corporation (URC) has been acquisitive over the last few years, highlighted by its $700m acquisition of Griffin’s Foods (NZ). URC is looking to leverage its large distribution footprint in Asian markets when acquiring Australian food manufacturing capability.
Acquiring distribution networks
Overseas players are engaging in the dual strategy of investing in Australian brands as well their distribution network. This allows them to give leading Australian brands exposure to new markets, while using Australian distribution channels for their own brands.
- Menora Foods acquired by Monde Nissin. As a distributor and marketer of some well-known brands such as Chobani and Cobram Estate, Menora has well established networks that Monde Nissin plan to leverage.
- De Costi Seafoods acquired by Tassal. This acquisition has allowed Tassal to better vertically integrate and take advantage of De Costi’s distribution network to the broad seafood market. Tassal paid $50m, 5x EBITDA.
Emergence of roll-ups
Even though one year forward valuation multiples in the food sector have come off in the past few months, they are still at a historically high level. We are seeing an increasing amount of roll-ups and backdoor listings in an attempt to leverage the high trading multiples in the public market.
- Nichols Poultry and Shima Wasabi farm acquired by Tasfoods. The acquisition of these small premium food businesses is an attempt to scale nationally and consolidate smaller private businesses.
- Hudson Food Group – IPO or trade sale following a roll-up of 14 businesses. (Subsequently pulled).
- Maggie Beer – backdoor listing via Primary Opinion (ASX:POP) for 48% stake.
- Beston Global Foods – strategic minority stakes in premium Australian food products with natural supply security, such as Ferguson Australia and B.-d. Farm Paris Creek.
China Australia Free Trade Agreement
The Free Trade Agreement between Australia and China, entered into last year, is progressively cutting tariffs on exports to China. Exporters are already benefitting from the commencement of the cuts, which will increase incrementally until the dates as follows:
- Beef: Elimination of tariffs by 2024 (currently 12-25%)
- Dairy: Elimination of tariffs by 2019-2026 (currently 10-19%)
- Sheep/Goat meat: Elimination of tariffs by 2023 (currently 12-23%)
- Wines/Spirits: Elimination of tariffs by 2019 (currently 14-65%)
- Horticulture: Elimination of tariffs by 2019-2023 (currently 10-30%)
- Grain/Seafood: Elimination of tariffs by 2019 (currently 10-15%)