International private equity firms show interest in Australian vegetable companies
The under-cover vegetable growing industry has remained sheltered from the erratic weather conditions of the past five years, according to market research organisation IBISWorld. As a result, international private equity firms have expressed interest in some of Australia’s major horticulture companies, with Costa Group’s impending initial public offering (IPO) the latest example of the trend.
Vegetables grown under cover (that is, in greenhouses or shadehouses) are less exposed to erratic weather conditions and variations in rainfall, which enables the industry to supply larger and more consistent yields. According to IBISWorld, this has appealed to major produce buyers, such as supermarkets, which seek reliable year-round supplies of consistent quality. While smaller growers have struggled over the past five years, larger players have benefited from major wholesalers and supermarkets increasingly shifting from transactional relationships to forward contracts.
Under-cover vegetable growing industry expected to grow
IBISWorld said the under-cover vegetable growing industry was expected to grow at an estimated 4.8 per cent annualised over the five years through 2014-15, driven by growing demand for reliable supplies of fresh produce.
Major under-cover vegetable growers have capitalised on this trend, and have attracted the interest of international private equity firms. In 2013, Chevalier International Holdings acquired Moraitis Group. Australian Food News reported in January 2015 had since been acquired by Australia’s largest family-owned fresh-produce marketing company, Perfection Fresh Australia.
Further acquisitions by foreign private equity firms expected
However, IBISWorld said further acquisitions by foreign private equity firms were expected, with Costa Group pursuing an initial public offering in early 2015.
Costa Group is a major grower and wholesaler of fruits and vegetables, and the biggest supplier of fresh food to Coles and Woolworths. Costa generated revenue of about $711 million in 2013-14. The company is a major player in the under-cover vegetable growing industry, contributing an estimated 8.2 per cent of industry revenue in 2014-15. IBISWorld said it expected Costa’s under-cover vegetable growing segment to grow by 6.9 per cent annualised over the five years through 2014-15, to $34.2 million, driven in part by the acquisition of smaller operations such as Adelaide Mushrooms in 2013. Although the company operated at a loss over the three years through 2013-14, it is still clearly viewed as a worthwhile investment, with sale rumours attracting the interest of Kohlberg Kravis Roberts and Champ Private Equity.
Perfection Fresh Australia has also worked to carve out a place in the industry. As a smaller player, Perfection Fresh reported revenue of $234 million in 2012-13. The Company completed a merger with D’VineRipe in June 2013, and acquired the Moraitis Group’s tomato-growing business in January 2015.
IBISWorld said these business additions, along with consistent investment in new glasshouses over the past seven years, have meant that Perfection Fresh now produces around one-third of Australia’s fresh tomatoes. The scale of its production has allowed it to cater to changing tastes with innovative trademarked tomato products. These products have helped to differentiate the company and foster brand loyalty, giving them an advantage over smaller generic growers.
Smaller companies set up co-operatives
IBISWorld said major under-cover vegetable growers, such as Perfection Fresh and Costa Group, benefit from greater access to capital, allowing them to pursue economies of scale. However, the cost of setting up glasshouses can be prohibitive for smaller players, which can also struggle because of their weak negotiating power with major buyers like Coles and Woolworths.
IBISWorld said that in an attempt to level the playing field, smaller companies have set up grower-run co-operatives to help meet demand quotas for large orders, although many of these smaller companies have still struggled to remain viable.
International investment could help industry ‘remain viable’
While smaller growers continue to struggle, the larger operations are generating interest among international private equity firms. After Chevalier International Holdings’ acquisition of Moraitis Group in 2013, speculation now centres on Costa Group. According to IBISWorld, international ownership, and thus international capital investment, might be the next adjustment in an industry that has already changed to remain viable.