By Jessica Yun
Less than 48 hours into the new financial year, two of Australia’s biggest listed food companies had either been sold to a foreign company or indicated it was headed that way.
At 8:13am on Monday, United Malt Group – the world’s fourth-largest commercial maker of malt that supplies to breweries and distillers – announced that it would be acquired by French giant Malteries Soufflet in a $1.5 billion deal.
Just a day later, Australia’s biggest horticulture giant Costa Group confirmed media speculation that it had received a $1.6 billion takeover offer from one of its biggest investors, US private equity firm Paine Schwartz Partners.
This pattern of Australian food and agriculture businesses ending up in foreign hands has been happening for decades, with iconic Aussie names such as Arnott’s, Foster’s and Uncle Toby’s ending up in offshore ownership. Last year’s $1.1 billion sale of Tassal to Canadian giant Cooke meant none of the country’s three biggest salmon producers are entirely Australian-owned.
The one thing Costa and United Malt do have in common is that their earnings forecasts had soured, offering suitors a handy point of entry. La Niña rain bombs last year and an ongoing avocado oversupply have resulted in bruised oranges and lower revenue for Costa, while United Malt recently posted a half-year loss of $13.8 million.
A quick glance at the other ASX-listed players like Bega, A2 Milk, Ingham’s and Maggie Beer all share a similar weakness.
“We will always see a lot of interest in the food businesses, particularly when they’re doing it tough,” says Tribeca lead portfolio manager Jun Bei Liu. “For investors who like to bargain hunt, this is your opportunity.”
Investment research firm Morningstar is on the same page. “We were telling clients to buy them,” says Morningstar equity analyst Angus Hewitt. “Why [are] they getting bought up now? Probably because they look cheap. It could be as simple as that.”
The cyclical nature of a food and agriculture business may be less appealing to short-term investors who want returns sooner. “Maybe if it’s in private hands, the operation of these businesses can be a little bit more long term in their thinking.”
Feeding the world
Certain events over the past few years have brought food security to the fore as a global issue – and highlighted how fragile supply chains can be. Russia’s ongoing war with Ukraine has sent energy, fertiliser, fuel and grain prices around the world skyrocketing, contributing to global inflation that central banks are now attempting to contain.
“I do think next decade, these companies will become quite highly sought after, and quite frankly, I think many of them won’t be listed anymore,” says Liu.
The total population of the world is expected to hit 9.7 billion by 2050. Wilson Asset Management portfolio manager and alternative assets expert Dania Zinurova points out we already hit the 8 billion mark earlier than expected. To feed this swelling population, a growing cohort of innovators in the plant-based and lab-grown food space are pushing their way into the mainstream.
Another reason why food companies are attractive targets is because they act as a natural hedge against inflation. “If we break down what sits within inflation, a lot of this will be food. For long-term investors, they do see agriculture as a very good inflation hedge, a very good long term strategic play within the portfolio,” Zinurova said.
Australian food and produce has earned a reputation around the world for being clean and green, she added, with our innovation in farming practices considered second-to-none. It also helps that the production and export volumes of Australian crops have broken records recently.
Our proximity to Asia also makes us compelling to investors or parent companies wanting to get a foothold in the region and capture the growing number of middle-class consumers. Costa is just one of many Australian companies that have a presence in Asia, with its international and export operations forming a growing part of its revenue pie. Geopolitically, trade tensions have been easing between Beijing and Canberra for months, signalling an improvement in trade flows to come.
“You are looking at a rapidly growing population, growing income per capita, changing demands in terms of what types of foods they consume,” Zinurova said.
“These factors, plus more generally a transparent market [that is] well regulated, pretty stable politically, still growing population-wise, still growing GDP-wise albeit more muted now … For anyone who is specialist in this area as an investor, Australia would be probably one of the most attractive markets.”
On the other side of the table, Australian businesses may find that being acquired is an attractive prospect to fuel the next phase of growth. While not a listed company, craft gin distillery Four Pillars’ sale to Japanese-owned beverages giant Lion earlier this week was one example of this: Four Pillars will be able to get in front of many more consumers by leveraging Lion’s vast distribution network than trying to make inroads from scratch.
“We’ve already had an order in New Zealand that’s more than any gin we’ve sold to New Zealand in the past eight years since we’ve been in [that] market,” Four Pillars co-founder Stuart Gregor told this masthead earlier this week.
For some, the steady loss of Australian food businesses is political. While Costa hasn’t been acquired by US private equity firm Paine Schwartz yet, the prospect of it raised alarm bells with at least one Australian, former Victorian premier Jeff Kennett.
Generally, a foreign takeover attempt of a major Australian business requires approval from the Foreign Investment Review Board (FIRB). In special cases though, treasurers of the day can, and have, intervened: in 2013, Joe Hockey blocked Australia’s biggest grains processor GrainCorp from a takeover by US-based global grain group Archer Daniels Midland. In 2020, Josh Frydenberg told Chinese dairy manufacturer Mengniu Dairy its $600 million bid for Lion Dairy & Drinks was “contrary to the national interest”.
More recently, when it was revealed that British billionaire Joe Lewis owns a controlling stake of nearly 51 per cent in Australia’s biggest wagyu producer, AACo, Prime Minister Anthony Albanese was questioned on radio about it. “A purchase such as this is substantial and that requires examination under the regulations that are in place,” Albanese said at the time.
More deals on the cards
However, the overarching macroeconomic environment is conducive to more takeovers. So far this year, the percentage of private equity activity is at 81 per cent, more than double 2022’s figure of 37 per cent, according to an EY report. Transactions slowed last year as climbing inflation and interest rates injected skittishness and volatility into capital markets.
“There is a lot of dry powder now globally,” says Zinurova. “So now you have this equation where you have a lot of capital available for investments, you have valuations potentially being corrected or companies being mispriced short term. But the businesses are still of good quality. There is the increase in public to private transactions.”
Tribeca’s Liu can envision a day when Penfolds maker Treasury Wine Estates or infant formula company A2 Milk passes into foreign hands. “There [have] been rumours for a very long time,” she said.