Buyers prone to overpay for Aussie agribusiness

Demand for food supply is pushing up the price of agricultural businesses in Australia where there are always more bidders than available assets, say M&A advisers.
Not every deal in the agribusiness sector turns out to be a cash cow
Not every deal in the agribusiness sector turns out to be a cash cow

Asian buyers are scouring Australia’s agricultural districts for suitable acquisitions but it isn’t always easy to make attractive returns on investment in the sector, says Anthony Sweetman, head of corporate advisory at UBS in Sydney.

This is because deals can be charged with emotion and prices are high relative to asset values.

All eyes have been on the sector following a couple of high profile cross-border transactions, including last year’s A$240 million (US$214 million) sale of a 93,000 hectare cotton farm called Cubbie Station to a consortium bankrolled by Chinese textile-maker Shandong RuYi.

Foreign interests were also behind a A$3.4 billion takeover of Australian grain handler Graincorp until the federal government blocked the deal in November last year on grounds that it was contrary to the national interest. US bidders Archer Daniels Midland (ADM) had been hoping to buy 100% of Graincorp and had sweetened its offer several times.

Then, in early February this year, Canadian company Saputo won a three-way fight for Warrnambool Cheese and Butter in the state of Victoria, paying an estimated A$500 million for the asset. Up until Saputo got involved, the mid-sized dairy producer hadn’t attracted much attention.

“Clearly the dairy sector has been red hot,” says Richard Loveridge, a partner at law firm Herbert Smith Freehills (HSF). “Asian appetite for milk powders appears to be a key driver as the dairy export market continues to grow. This is one of the reasons there was so much interest in Warrnambool Cheese and the sale was so aggressively contested.”

HSF was an adviser on the deal, acting for rival bidder and minority shareholder Murray Goulburn. Murray Goulburn originally wanted to acquire the full business but was outbid by Saputo, forcing it to withdraw its bid and sell its 17.7% stake to the Canadian acquirer.

In the past month, HSF’s agribusiness team has also advised on the acquisition of United Dairy Power Group by a consortium led by Hong Kong businessman William Hui, and a successful move by Sumitomo Corporation to increase its stake in Emerald Grain to 100% from an initial 50% interest.

Loveridge says auctions become more intense when large overseas buyers enter the fray. “When you have a big international player in the mix other bidders naturally worry about them having very deep pockets,” he says.

In the case of Warrnambool Cheese, Saputo was known to have missed out on a number of previous acquisitions and was determined not to lose again. “Saputo was ready to pay a premium to secure the asset,” says Loveridge.

The lack of other competitive M&A transactions in the market at the time, and the recent rejection of ADM’s Graincorp bid, meant that Warrnambool Cheese deal received an overwhelming amount of media coverage.

Sweetman says agribusiness deals are often charged with emotion. “In most countries agriculture and foreign land ownership is an emotive topic,” he says, indicating people feel connected to the land and are conscious of their need to maintain food security.

On the whole, deals in the sector tend to be small and there are always more bidders than available assets. “The only really big deals are in the grain space,” says Sweetman.

He says acquirers need to do their homework and be confident they can actually achieve a return. “Deals rarely work out for buyers when they pay an overly high price in any sector,” says Sweetman.

That said, he expects interest in the sector to remain high as overseas companies look to add supply and scale.

“Most of the corporate interest is in agricultural processors rather than primary producers,” says Sweetman. “Processors tend to have more stable returns than primary producers who are exposed to the weather and commodity price volatility.”

Loveridge at HSF agrees. “Operating a processing facility is much like operating any industrial or manufacturing operation – the risks are known and easy to manage,” he says.

 

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