United Malt: Takeover Bid Formalised, Appears Likely To Proceed

Malteries Soufflet’s proposed takeover of no-moat United Malt UMG looks likely to proceed now the two firms have entered into a scheme implementation deed. The AUD 5 offer is attractive on valuation grounds, representing a 45% premium to the share price prior to the indicative proposal being announced, and a 25% premium to our stand-alone valuation. The deal has unanimous director support in the absence of a superior offer. We think there is a low chance of interlopers as the strategic role United Malt serves to Malteries Soufflet limits potential suitors from being able to pay such a premium.

While Malteries Soufflet has formalised its offer, we make no changes to our AUD 4.75 fair value estimate for shares in United Malt, which represents a 75% chance of the deal proceeding. There remain a number of hurdles, including the Australian Foreign Investment Review Board, competition regulators in Australia, Canada, and the U.K., and shareholder support. United Malt is preparing a scheme booklet, which will include an independent expert’s report, detailed reasons for unanimous support from United Malt directors, and detail on the timeline—including the scheme meeting. All else equal, we would revert to our prior, standalone valuation of AUD 4 per share should the deal fall through.

Operationally, United Malt appears set for a stronger second half, coinciding with higher beer demand amid the Northern Hemisphere summer. Despite recent profitability pressure, gross margins began to improve during the latter stages of the first half as improved commercial terms begin to take effect. We think Canadian barley prices and quality headwinds are also unlikely to be repeated, with a significant improvement in Canadian barley production slated for 2023 and 2024. We make no changes to our fiscal 2023 underlying EBITDA forecast at the midpoint of AUD 140 million to AUD 160 million guidance, representing a 41% improvement from fiscal 2022, but still 15% below pre-COVID-19 fiscal 2019.