Nervous wait as Costa hopes takeover bid will come to fruition

Costa is Australia’s largest grower, packer and marketer of fresh fruit and vegetables.

Costa may have updated the market only days ago about the progress its suitor Paine Schwartz Partners is making. But given how takeovers have unfolded lately, some are still nervous.

Shares of the fruit and vegetable grower are trading at $3.31, below the $3.50 offer price, and the eight weeks of due diligence Paine Schwartz was offered finished about two weeks ago.

By comparison, TPG Capital’s due diligence on funeral services provider InvoCare took far longer than many expected, and after it extended its exclusive period by a week, it came back with a reduced offer of $12.70 per share almost a month later.

Negotiations between Potentia and Tyro Payments took months, only for Tyro to eventually walk away.

Costa told the market on August 14 that due diligence was continuing.

But time kills deals, which is why some are wondering whether Paine Schwartz will follow through.

Sources close to the buyout fund haven’t suggested the deal won’t be finalised, with offshore site inspections completed and progress on funding the transaction.

One problem for deals in the current market is that funding costs have escalated.

Debt needed for agricultural companies like Costa is typically less than for other sectors – around three times earnings compared to five to six times for other industries when private equity groups are buyers.

Paine Schwartz already owns 13 per cent of Costa, so it’s in a position to play hard ball on price if it wants to, given it has few rivals and the target has an uphill battle achieving its future earnings targets.

Paine Schwartz knows Costa well. It was the major shareholder alongside the Costa family at the time of Costa’s initial public offering back in 2015, so it wouldn’t need a long time to familiarise itself.

Costa, which is working with UBS, granted eight weeks of non-exclusive due diligence that started on June 6.

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

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.

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.