Inside the juicy battle for Vitalharvest as minnow takes on Macquarie

Costa Group says it wants certainty from the takeover contest for its landlord Vitalharvest. But the fruit and vegetable company had the chance to buy it itself more than two years ago.

The price of Blueberries has surged.

Two years ago Australia’s biggest fruit and vegetable company, Costa Group, offered its landlord $220m to buy the land it grows its blueberries on. But it was rebuffed. The offer was too low.

At the time, a 125g punnet of fresh blueberries was selling for about $2-3 in supermarkets, but its landlord, Vitalharvest, believed its land was worth at least $300m.

Each side could have easily said the other was dreamin’. But the clear winner now appears to be Vitalharvest. That same punnet of blueberries is now selling for about $7.50 and Vitalharvest has been the target of a fierce bidding war.

On Friday that battle became more juicy. Sydney investment firm Roc Partners lifted its bid for Vitalharvest from $1.23 to $1.25 per unit on Friday, valuing the trust company at $346.25m. It came five days after Vitalharvest accepted Macquarie Infrastructure and Real Assets’s bid of $1.24 a unit in the absence of a superior offer.

Within hours of Roc’s refreshed offer, Macquarie retaliated, lifting its own to $1.26. As for Costa Group, its newly appointed chief executive Sean Hallahan made no secret of its preferred suitor: Macquarie.

Mr Hallahan said Costa’s assets made Vitalharvest’s landholdings valuable, and like any tenant the company was looking for certainty, which Roc has yet to provide.

“They, in our opinion, are taking a huge gamble. We believe that they’ve been given advice that doesn’t gel with our view of the world,” Mr Hallahan told The Australian.

“By that I mean that there are plainly some assets that are the centrpiece of this deal but it’s almost like Roc are not placing any value on what Costa brings to the table.”

But there is another reason why Costa prefers Macquarie: fixed price rent.

When Costa entered its lease with Vitalharvest, the trust company was a subsidiary of Costa Asset Management, which belonged to the same family who founded Costa Group. Costa leadership, under then chief executive Harry Debney, even drafted the lease agreement, which included a clause of sharing 25 per cent of the profits in its citrus and berries business with Vitalharvest.

And it is that clause, which has become a source of irritation inside Costa Group. As berry prices rise, so does the share of the profits it pays Vitalharvest.

“Like any tenant what we’re looking for is certainty - long-term certainty - and this situation at the moment we really only have certainty from the Macquarie arrangement. With Roc, they’ve obviously taken a very different approach,” Mr Hallahan said.

Macquarie also could have bought Vitalharvest before it listed on the ASX in August 2018. It was given the change to buy the trust but The Weekend Australian understands it offered $232m - again way off the $300m Vitalharvest wanted.

This year, Macquarie looked set to finally pay the asking price. But it had some unexpected competition. Earlier this year, Roc launched its Agri Infra Fund, and was on the hunt for new assets.

In February, it lobbed a cash bid of $1.08 per unit - valuing the company at $315m - trumping Macquarie’s then offer of $1 per unit. The move appeared timed to derail the well-advanced play by Macquarie for the Vitalharvest.

For Costa Group, it represented an unknown player, and Mr Hallahan said he has not engaged with Roc and can “only speculate” on their strategy. Roc meanwhile says it has tried to contact Costa but is yet to receive a reply and keen to enter talks.

But Mr Hallahan wants to make it clear that Costa has contributed much to the high blueberry prices and if its lease ended with Vitalharvest it new prospective tenant would struggle to maintain the premium.

“Corindi is the most populous area for berry growing in Australia. When everyone comes into harvest there is obviously price deflation,” Mr Halahan said.

“Our strategy to combat that is all about our genetic breeding program, and in particular one variety that we have been very public about achieving a price premium of around 25 per cent.

“Now if someone else was to come into that landholding and just try to compete with the public varieties then there is no way they’d be able to get the levels of profitability that we do.”

Mr Hallahan said Costa could even relocate those premium berries, given they are planted in pots.

“The other thing in our favour is the lease still has five years to run, so five years is a long time to work out where else we could grow.”

Similarly, with Costa’s citrus farms, on which Vitalharvest owns the land, the company has created a profitable market that is not reliant on China.

“Unlike every other major citrus exporter in Australia, our key markets are actually Japan, not China. And our second key market is the US.

“We’ve taken 15-16 years to build those relationships, and given the scale of the volume that we bring to market, it’s not a simple thing to just walk in and start being able to sell that level of fruit into other markets.”

But Roc investment director Frank Barillaro is all too aware of those achievements - it’s what attracted him to Costa in the first place.

“We admire what the Costa Group has achieved in the industry especially over the last several years and the company seems to go from strength to strength,” Mr Barillaro told The Australian.

“We have made it known publicly from the outset that we are happy with the assets and the current lease terms, but most importantly in having Costa there as a tenant. We genuinely hope that we can continue this relationship with Costa who we think would be a wonderful counterparty to do business with.”