China’s Bellamy’s bid turns focus on Costa being ripe for picking

Costa remains under the spotlight at a time when more deals are expected to occur in the consumer space.

Mengniu’s $1.5bn advance on Bellamy’s Australia has market watchers thinking what could be next on the agenda in the agriculture space, and the name that continues to surface is Costa Group Holdings.

The enormous 59 per cent premium outlaid by Mengniu for listed infant formula producer Bellamy’s was understood to be justified by the opportunities the Chinese government-backed group would have to further distribute its produce in China.

One of the factors said to be holding Costa back is its lack of opportunities to more deeply penetrate the lucrative Chinese market. A Chinese owner could boost the company’s revenue streams in Asia.

Costa shares dived August 23 when the fresh fruit and vegetable grower, packer and marketer posted a 15 per cent fall in its net profit for the half year due to challenging weather conditions. The company’s market value sits at $1.19bn.

It is more likely to be a Chinese group rather than a private equity firm that makes a play for Costa. If not a buyout fund, a global strategic company could run the ruler over Costa, such as Dole Food Company, Del Monte or Simplot.

Paine and Partners owned Costa with family founders before Costa was listed in 2015 at $2.25 a share, equating to a $717m market value. The consensus is that the market paid top dollar at the time.

Buyout funds typically shy away from groups exposed to seasonal volatility linked to the weather, but could swoop if they gain the shares at a good price.

Costa remains under the spotlight at a time when more deals are expected to occur in the consumer space.

Another challenge for private equity would be securing financing for the company, so a global competitor could also be a more likely buyer.

Meanwhile, short sellers were caught out by the takeover bid for Bellamy’s this week that came out of left field.

At one stage in 2017, Bellamy’s, which is under offer at $13.25 a share, had crashed to below $4 on the back of regulatory changes in China, but the shares had rebounded to almost $20 the following year, with Australian dairy and produce in demand within China.