Quelle surprise - Malteries Soufflet has been courting United Malt for 15 months

News Analysis 30 March

Quelle surprise - Malteries Soufflet has been courting United Malt for 15 months

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In February 2022, Mergermarket lined up an interview with CEO Thierry Blandinières, the boss of French agricultural cooperative InVivo, to discuss the group’s M&A plans. Ahead of the meeting, the Flash asked our colleague to press Blandinières on rumours group was planning a tilt at Australia-based peer United Malt [ASX:UMG]. He played down the possibility.

UMG's announcement Tuesday (28 March) that it has received and is minded to accept a AUD 1.5bn (USD 1.0bn) indicative offer from Malteries Soufflet, InVivo’s malt unit, has made it clear that our initial hunch was correct. According to a report citing UMG Chairman Graham Bradley, talks with Malteries Soufflet started around 15 months ago - January 2022.  

In fairness, and as our Flash column noted at the time, Blandinières indicated that a bid was not on the cards in the short-to-medium term as conditions for an expansion in Australia “are not met for the moment”.

Well, it looks like he thinks those conditions have now been met.

Shares in UMG this week jumped more than 34% to AUD 4.61 (from AUD 3.44) following news of the AUD 5 p/s non-binding offer. The potential deal is trading with an 8.5% net spread and an implied market probability of closing of 75%, based on an AUD 3.44 p/s downside. This is surprisingly low and perhaps reflects some perceived regulatory risks. It’s very difficult - but not impossible - to see a private equity consortium topping the strategic buyer.

InVivo looks committed. When the USD 2.5bn acquisition of Soufflet Group was completed in December 2021, it said it aimed to double the size of its malt business and become “the world's largest producer of beer ingredient malt within five years”.

A decent offer

The non-binding proposal values UMG at 18.41x EV/TTM EBITDA, much higher than peers and precedents that the Flash has identified in the food and agriculture sector. UMG is the only large-cap listed malt player globally and has few, if any, direct comparables.

UMG demerged from Graincorp [ASX:GNC] in 2020. The selected group of Australasia and international food and agriculture peers mentioned in UMG’s demerger document are currently trading in the range of 7.26x - 10.56x EV/EBITDA. Mergermarket data shows M&As for listed food processing and agricultural targets in Australia and New Zealand over the past five years have a median EV/EBITDA multiple of 13.88x.

Vidhur Rangaswamy, portfolio manager of Tanarra Capital, UMG’s largest shareholder with a 10.81% stake, acknowledged the offer is “in the ballpark” but said he’s disappointed to see a bid come before the company “improves its operating performance”. He said UMG’s strategic value is unique and hard to replicate.

Tanarra, which was partly behind Graincorp’s decision to restructure and spin-off UGM, steadily built its position in UMG between November 2021 and August 2022 and has an average buy-in cost of around AUD 3.76 p/s.

Other UMG shareholders include GrainCorp (8.5%), Ethical Partners (8.3%), Australian pension funds Aware Super (8.41%), Australian Retirement Trust (7.22%), Host-Plus (6.74%), Funds SA (5.64%), and Yarra Capital (5.31%), according to Eikon data. Asset manager L1 Capital is currently holding around 4.9% stake, the Flash calculates.

Conditions and rival bid prospects

The 28 March announcement reveals that UMG has agreed to grant Malteries Soufflet exclusive due diligence after it submitted a revised AUD 5 p/s proposal – this came after three rounds of bids (AUD 4.15, AUD 4.5, AUD 4.9) since 16 December 2022.

The willingness to raise its bid several times suggests UMG has let its suitor know that other bidders have been lurking. Indeed, our report last year was triggered by continual rumours and speculation that various strategic and private equity players have been circling the business. This week the AFR reported that Malteries Soufflet is not the only maltster to have approached UMG since early last year.

The Flash previously pointed to antitrust and FDI regulatory concerns as being one hurdle for an InVivo led bid for UMG. UK-based Boortmalt, Malteries Soufflet, Malteurop and UMG are the four largest maltsters globally, together accounting for 40% of the global market share, Blandinières said in February 2022.

The combination of the second and fourth largest player would make InVivo the world’s top malt producer, beating Boortmalt, and generate a combined annual production of 3.7m tonnes of malt. The French group already possesses 20% of the malt market, Reuters reported citing CEO. 

UMG generates 60% of revenue out of North America (Canada and US, explicitly), 21% from Europe, 7% from Australasia and 12% from rest of Asia, as per its FY22 annual report. Malteries Soufflet’s takeover of UMG would put Australia’s large-scale malting productions all under control of French companies.

Conditions outlined for the indicative proposal include: ACCC and FIRB approval, UMG board’s unanimous recommendation, satisfactory completion of exclusive due diligence, consultation with Malteries Soufflet’s works council, final approval from the bidder’s board and shareholders – InVivo, KKR, Bpifrance and Credit Agricole.

Specifically, UMG has granted the bidder a 10-week exclusive due diligence period which is expected to end in June, but the “no talk”, “no due diligence” obligation is subject to only four weeks – that means, after four weeks rival bidder can start to engage with UMG in May.  

Rival consortium?

Whilst a private equity firm is unlikely to top Malteries Soufflet on its own, it seems feasible that a leveraged buyout attempt involving a strategic player could have a go. Malteries Soufflet’s ownership structure, which includes KKR, is surely evidence of that. As L1 Capital noted in a quarterly report for its Catalyst fund at the time of its initial UMG investment, Australian Superannuation funds are increasingly involved in public M&A deals and this trend is set to continue into 2022 partly due to their cheaper cost of capital. That observation still seems relevant.

It will be interesting to monitor regulatory developments. Any snag could entice a domestic rival bid.