Analysts back $1.6bn Paine Schwartz bid for Costa

Costa Group has flagged a brighter outlook after its citrus crops were earlier hard hit by flooding. Picture: iStock

Paine Schwartz Partners’ $1.6bn proposal to buy the fruit and vegetable grower Costa Group has been described by Morgans analysts as “a great outcome” for shareholders.

The company confirmed reports in DataRoom on Monday that Paine Schwartz had lobbed an offer for Costa Group, the company it previously owned.

Costa Group on Monday told the market that it had received a buyout proposal on May 31 at $3.50 a share from Paine Schwartz.

The private equity firm raided the group’s register in October, amassing a 13.78 per cent exposure at $2.60 per share through investment bank Citi.

“As we have been saying since they raided the register in October 2022, private equity don’t just take stakes in companies, they take them over,” said analyst Belinda Moore in a Morgans research note.

“We view Paine Schwartz’s $3.50 indicative takeover proposal as a great outcome for Costa shareholders, given the execution risk involved in delivering its growth projects and targeted returns over the next few years,” she said.

“Also, Costa’s earnings are just too volatile for the listed market.”

Ms Moore said based on Morgans’ forecasts, the offer price was 8.8 times earnings before interest, tax, depreciation and amortisation for the 2024 financial year.

“In our view, assuming average seasonal conditions and pricing, an on-year citrus crop and delivering on the expected returns of its growth projects, the business should be capable of delivering about $300m of EBITDA.

The Morgans note said with a 8 to 9 times agricultural takeover multiple applied to the 2024 financial year forecast, Morgans had a valuation on the stock of $3.09 to $3.74 per share and $3.50 was in line with this.

Paine Schwartz is highly familiar with Costa, being the major shareholder alongside the Costa family at the time of Costa’s initial public offering back in 2015.

Paine Schwartz sold 54.2 per cent of Costa in its initial public offering at $2.25 per share, leaving it with a 12.21 per cent stake, and Paine Schwartz’s chief executive was on the Costa board for a number of years.

In the years following the IPO, when Costa was trading at a very healthy premium to its issue price, Paine progressively sold down its stake in Costa, with one block trade at $6.55 per share.

While US-based berry marketing company Driscoll’s is not present when it comes to the bid, it is thought to have an involvement with Paine Schwarz behind the scenes, holding about 5 per cent of Costa Group and also having Driscoll’s executives on the Paine Schwartz advisory board.

Costa is Australia’s largest grower, packer and marketer of fresh fruit and vegetables, supplying produce to supermarket chains as well as independent grocers and a range of food industry stakeholders.

The business also exports to Asia, North America and Europe, growing produce including berries, mushrooms, tomatoes, citrus, table grapes, bananas and avocados across 3,500ha in Australia.

Ms Moore said other potential takeover targets in the agricultural sector are Namoi Cotton and Australian Vintage, which have both appointed advisers in recent days for strategic reviews.

She also questions why Incitec Pivot’s $400m buyback has been delayed, indicating it could point to some sort of corporate activity.

Costa told the market on Tuesday it had verbal engagement in April with Paine Schwartz in relation to a potential approach at a range of $3.20 per share to $3.30 per share.

The latest $3.50 per share offer would be a 34.6 per cent premium to the price of $2.60 per share at which Pain Schwartz acquired a 13.78 per cent relevant interest in Costa on October 25.

Costa, which is working with UBS, has granted eight weeks of non-exclusive due diligence that started on June 6 to enable Paine Schwartz to determine whether to put forward a binding proposal.

Paine Schwartz has indicated that it has received approval from the Foreign Investment Review Board to acquire all of Costa.