US giant Paine Schwartz Partners offers $1,6bn for Costa

If approved by Australian regulators, Costa could be the latest Australian agri company to be taken by an overseas buyer.

Blueberries being picked at one of Costa’s farms.

The sweep-up of undervalued and unloved agricultural stocks gathered pace on Tuesday after the nation’s leading grower, packer and marketer of fresh fruit and vegetables, Costa, revealed it had been approached with a $1.6bn takeover bid from giant US private equity firm Paine Schwartz Partners.

If the bid succeeds, Costa will join other prominent Australian agricultural takeovers such as salmon producers Tassal and Huon Aquaculture, and United Malt, which has recommended a $1.5bn French bid.

The Costa bid requires Foreign Investment Review Board approval.

Paine Schwartz Partners approached the ASX-listed company on May 31 with a non-binding indicative offer of $3.50 cash per share.

Shares in Costa rocketed almost 14 per cent on the takeover news, and later closed up 38c, or 12.84 per cent, at $3.34.

The Costa business, founded by the late Frank Costa and his family, exports berries, mushrooms, tomatoes, citrus, table grapes, bananas and avocados to Asia, North America and Europe.

Costa had kept the takeover offer secret, not revealing that Paine Schwartz Partners had been granted an eight week period of non-exclusive due diligence from June 6, but The Australian’s Data Room revealed the takeover approach and discussions on Monday.

Paine Schwartz Partners values Costa at $1.6bn but will need Foreign Investment Review Board approval.

New York-based Paine Schwartz Partners is a private equity company with plenty of cash that specialises in sustainable food chain investing, with more than $7bn in total acquisition value over its 20-year investment track record.

In November the District of Columbia Retirement Board committed to investing $US100m in Paine Schwartz Partners’ newly launched Food Chain Fund VI, and it looks like the private equity investor is starting to deploy those funds.

Besides the bid of $3.50 per share, Costa shareholders are also entitled to any interim dividend of up to 4c per share declared for the six months period to July 2. This values the fruit and vegetable grower at $1.6bn – a strong premium to where the stock has been trading for the last few years as profit downgrades and poor results crushed its share price.

Costa shares haven’t traded above $3.50 since early 2021 and have been falling since 2018.

Paine Schwartz Partners knows the Costa business intimately, having been an early investor. Then called Paine & Partners, at one point it had a 54 per cent stake before Costa was listed in 2015 at $2.25 a share, equating to a $717m market value. Paine Schwartz founder and president Kevin Schwartz had a seat on the Costa board upon its ASX float.

Paine Schwartz Partners pounced on a 13.78 per cent stake in Costa in October last year, paying $2.60 per share.

Costa said in a statement to the ASX on Tuesday that further due diligence and negotiations on a potential scheme implementation agreement were expected to continue through July. “There is no certainty that the indicative proposal will result in a binding offer or that any transaction will eventuate,” it said.

Costa oversees 7200ha of planted farmland, 40ha of glasshouses and three mushroom facilities across Australia.

The Costa business exports berries, mushrooms, tomatoes, citrus, table grapes, bananas and avocados. Picture: Richard Walker

It also has strategic foreign interests, with majority-owned joint ventures covering six blueberry farms in Morocco and four in China, covering 750ha.

Wilson Asset Management lead portfolio manager Oscar Oberg said the agricultural sector had been out of favour and many investors had sold out of well-known players, depressing share prices and creating opportunities for bidders.

“You need to remember that a few years ago those types of companies had favourable conditions, companies like Elders and GrainCorp in particular, and they have been sold off quite heavily from their highs,” he said. “Stocks in the agri sector which have been really hit hard by conditions.

“ I think opportunistically you are seeing Paine Schwartz Partners and United Malt bidder Malteries Soufflet taking advantage and buying what are strategic assets. And it wouldn’t surprise me if there is more takeover activity.”

Wilsons analyst James Ferrier said the indicative bid price from Paine Schwartz Partners implied a price to earnings ratio of 20.5 times fiscal 2024 earnings. This compared with a historical trading range for Costa shares of between 17 and 24 times and P/E of 15 against the price when the company was floated on the ASX almost 10 years ago.

“On balance, we believe Paine Schwartz Partners’ indicative bid price is likely to be supported.”