United Malt is expected to come out with the details of a $1.3bn-plus buyout proposal by Kohlberg Kravis Roberts-backed French malt company InVivo before the market opens on Tuesday.
Providing defence advice is Macquarie Capital, while Goldman Sachs is working for the bidder whose identity was revealed by DataRoom online on Monday.
The company was placed in a trading halt on Monday, pending news about a change of control proposal.
With shares last trading at $3.44 each and the group’s market value at $1.03bn, sources expect the bid to be higher than $4.50 per share, which would be at about a 30 per cent premium to the last close.
United Malt was trading at around $4.50 at the start of last year.
Market analysts say from a recent investor day it became clear that the worst of the company’s problems were now truly behind it, as it looks to capitalise on a Canadian drought, which is limiting the global supply of grain production used for malt.
Other private equity groups have been around the hoop before.
Ahead of United Malt’s demerger from GrainCorp, private equity firms were looking, including KKR, BGH Capital and Partners Group.
The Carlyle Group has also looked since, so it will be interesting to see if any will respond to InVivo’s strike.
Yet, InVivo is strongly positioned, owning the world’s second largest malt producer, Malteries Soufflet, which it purchased in the past two years for $US2.5bn (AUD$3.76bn), and an acquisition would create the world’s largest malt producer.
The merger deal was after KKR bought a minority stake in Malteries Soufflet in 2021, along with Bpifrance and Credit Agricole Group, injecting EUR440m into the company.
Strategic groups not only have synergies, but are better able to compete with private equity, hamstrung by higher debt costs.
In recent weeks, United Malt’s share price dipped before recovering slightly.
Supply chain disruptions, the cost of importing barley a worsening barley crop and general inflation were blamed for United Malt’s lower earnings guidance last year before its result, prompting suitors to hold discussions with advisers about a possible buyout.
Ironically, when United Malt was spun out of GrainCorp several years ago, it was seen as the better-performing business.
Should a deal go through, it will be great news for GrainCorp, given it owns about 8.5 per cent and could use the proceeds to fund its only merger and acquisition deals.
United Malt’s shares were at the lowest level since it was demerged around August, trading at around $2.88 or $852m on a market value basis, and GrainCorp was firing on the back of a shortage of global grain supply and bumper crop conditions.
Around August, sources said a suitor may win the support to buy the business at about $4 a share.
The attraction for private equity was that many of the problems United Malt was facing were industry-wide and likely to be short-lived.
But a challenge for private equity could be that earnings are cyclical – if it increases production and too much malt enters the market, prices fall.
United Malt had been in talks last year with its banks over its growing debt pile linked to high barley costs – its debt briefly was to be over its target range of between 2 and 2.5 times before returning to its targeted range this year.
Tanarra Capital, set up by activist investor John Wylie, owns a 10.8 per cent interest in United Malt, the fourth largest malt businesses in the world.
The largest malt company is Belgium-based Boortmalt, backed by Temasek out of Singapore.
InVivo has been on the acquisition trail as part of its aspirations to grow Malteries Soufflet, buying in January one of Belgium’s oldest malt companies, Castle Malting.
Analysts at Citi in December had tipped InVivo as a potential buyer of United Malt, as reported by this column at the time.
This was after reports suggested its target was to double its malting capacity over five years, targeting acquisitions in the US, Australia and other regions.
At the time that InVivo purchased Soufflet, it had said that their strategy was to bring together their grain trading activities while also uncovering value in complementary businesses with limited overlap, including Soufflet’s flour milling and malt production and InVivo’s wine distribution.
Citi analysts said United Malt was a likely target for InVivo because of its existing capacity in the North American and Australian markets, the quality of its assets and the cheap market value relative to the earlier malt transaction at 12 times earnings before interest, tax, depreciation and amortisation (EBITDA).
Cargill Malt was sold to French company Axereal for about 12 times.
The analysts said they viewed United Malt as a high-quality reopening play, with the company’s malt-processing capacity set to recover to pre-Covid-19 levels by the 2023 financial year.
It would be driven by the continued recovery in on-premise beer consumption in the US and Asia and with Scotch whisky exports.
EBITDA was expected to grow at about 17 per cent on average to the 2024 financial year due to the market recovery, capital spending on an expansion in Scotland and benefits from the company’s transformation program.
GrainCorp acquired United Malt in 2009 for $757m.
Most of United Malt’s customers are craft brewers, while major domestic brewers account for about 25 per cent, and major international brewers about 28 per cent.
It generates 61 per cent of its revenue from North America and 17 per cent from Europe.
Other large industry players are Cargill and Malteurop.
United Malt’s earnings before interest, tax, depreciation and amortisation to September 30 fell 20 per cent to $91.8m.
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