Costa Group: Indicative Proposal From Paine Schwartz Partners a Good Deal for Investors

We raise our fair value estimate for no-moat Costa Group CGC to AUD 3.40 per share following a nonbinding indicative proposal from private equity company Paine Schwartz Partners. The increase to our fair value estimate represents a 75% probability of a deal going through at the indicative price of AUD 3.50 per share. All else equal, we would revert to our prior, stand-alone valuation of AUD 3.10 per share if an offer is not forthcoming.

The proposal is already well advanced. Paine Schwartz acquired a 14% stake in Costa on Oct. 25, 2022, after which Costa and Paine Schwartz began to have discussions around a potential approach between AUD 3.20 and AUD 3.30 in April 2023. On May 31, Costa received the eventual AUD 3.50 indicative proposal. The Costa board subsequently granted eight weeks of nonexclusive due diligence, commencing June 6 to advance a potential binding proposal. The AUD 3.50 offer is relatively attractive on valuation grounds, representing a 34% premium to the closing price prior to the proposal and a 13% premium to our stand-alone valuation. But the deal remains highly conditional, subject to due diligence, regulatory approvals, and Costa shareholder approval. Paine Schwartz has indicated it has already received approval from the Foreign Investment Review Board, but it may need to be revisited once potential co-investors are finalised.

Operationally, conditions are improving for Costa. We expect a strong 2023 result. Wet weather conditions, courtesy of La Nina, weighed on citrus quality and avocado volumes in 2022. But the Australian Bureau of Meteorology indicates El Nino is probably around the corner. El Nino typically reduces rainfall during winter and spring, leading to better crop yields and quality in Costa’s main farming areas. We also expect elevated input costs, notably in fertilisers and labour to continue easing.