Costa: Lower Offer Still Likely To Proceed

Despite Paine Schwartz Partners lowering its indicative offer to acquire no-moat Costa CGC by 9% to AUD 3.20 per share, we continue to think the deal is more likely than not to proceed. While now at a much-reduced premium, the offer is still relatively attractive on valuation grounds, representing a 22% premium to the closing price prior to the proposal and a 3% premium to our stand-alone valuation. Paine Schwartz indicated that this is its final offer. We lower our probability-weighted fair value estimate to AUD 3.18 per share on the lower offer. All else equal, we would revert to our stand-alone valuation of AUD 3.10 per share if a binding offer fails to materialize.

We are not surprised by the lower bid. We had previously flagged that the risk that Paine Schwartz returns with a lower offer (or walks away completely) has risen in light of the more challenging near-term outlook. The overhang from wet weather conditions is set to weigh on citrus volumes and size in the second half of 2023, and softer tomato demand combined with high industrywide supply is set to weigh on pricing in the near term.

Nevertheless, we think shares screen cheap on even a stand-alone basis. We think headwinds are likely to prove short-term and continue to expect citrus quality to improve as the weather normalizes. Indeed, Costa noted the factors weighing on citrus quality, namely wet weather, are considered nonstructural, and the ongoing health and productive capacity of the trees remain unaffected. The Australian Bureau of Meteorology indicated drier conditions are probably around the corner, leading to better crop yields and quality in Costa’s main farming areas. We also expect elevated input costs, notably in fertilizers and labor, to continue easing. In the longer term, we expect low- to mid-single-digit domestic fruit and vegetable growth to be supported by population growth, inflationary price increases, and a continued increase in per capita fruit and vegetable consumption.