US private equity interest in horticulture play Costa blooms but buyout doubted by some analysts

Followers of the market’s agribusiness sector – where there has been some takeover activity recently (Vitalharvest, Tassal and United Malt Group, to name a few) – have now locked on movements within the share registry of horticultural grower Costa Group.

US private equity firm Paine Schwartz Partners has lifted its stake in Costa Group after it had raided the register in October last year, amassing a stake of just over 13 per cent.

Now a substantial shareholder notice to the market has revealed that Paine Schwartz holds 14.84 per cent of the company, up from 13.78 per cent.

But a takeover might not be the next logical step, argue some analysts, with Paine Schwartz likely seeking a financial interest as part of a long-term investment plan rather than a strategic interest that could be a precursor to a buyout.

This probably gels with recent commentary around when Paine Schwartz first popped up on Costa’s share registry. The New York-based company, previously called Paine & Partners said at the time that it had no intention to bid for Costa, but was keen to gain a board seat, subject to Foreign Investment Review Board approval.

Paine Schwartz is a private equity company specialising in sustainable food chain investing, and has more than $7bn in total acquisition value over its 20-year investment track record.

Macquarie says in a note to its clients that part of the firm’s strategy is to leverage industry experience to create value within investments, including recruiting experienced talent, expanding into new geographic markets/broadening customer base, and M&A opportunities.

“Furthermore, invested capital across each of Paine’s funds has historically been around $US1bn versus Costa’s current market cap of $US766m,” the Macquarie note says.

“Paine also typically deploys $US10m-$US120m per investment, which compares to its current investment in Costa of around $US116m.”

But the activity will likely put a floor under the share price around $2.60 per share in Macquarie’s view.

The links between Paine and Costa run deep.

Then called Paine & Partners, it owned Costa with the family founders before it was listed in 2015 at $2.25 a share, equating to a $717m market value.

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 exports to Asia, North America and Europe, growing produce including berries, mushrooms, tomatoes, citrus, table grapes, bananas and avocados.

The Costa family entered into a strategic partnership with Paine as an equity partner in 2011 to support growth and the development of its operations. At the time, Kevin Schwartz from Paine was appointed to the Costa board. He is one of the founding members and the CEO of Paine, a private equity company specialising in sustainable food chain investing.

Before the float, the US private equity firm held a 54 per cent interest in Costa, with this reducing to 12 per cent of shares on issue on the ASX listing in 2015.

Shares in Costa are down almost 20 per cent in the past year as its operations were struck by a number of issues, including higher wages bills, floods affecting its citrus crops, and pricing pressure from a glut of avocados in the market.

This has caused profit warnings and the depressed share price, which now looks to be attracting opportunist investors such as Paine Schwartz and other players at a time when food supply chains are becoming increasingly important.

Paine Schwartz certainly has money to plunge into agri plays such as Costa, with the private equity firm according to reports in US investment circles attracting cash-rich US pension funds to invest in its latest food investment fund.