Property

Property: Who wants to buy Australian farms?

Margeaux Beauchamp, BDO Australia, 09/11/2016

Margaux Beauchamp

In this analysis, BDO Australia’s executive director corporate finance Margaux Beauchamp defines four key interest groups targeting Australian farm investment assets.  The key for business owners seeking buyers and/or equity investors is to understand the difference in these various investor groups before heading to market, she suggests.

 

 

 

INVESTMENT in Australia’s food and agribusiness industry is currently ‘in fashion’, with the current battle for Kidman highlighting the different investor groups in the mix.

Australia’s agribusiness industry is attractive to a range of different investment groups and continues to be the subject of attention for both domestic and foreign investors. The key for business owners seeking buyers and/or equity investors is to understand the difference in these various investor groups before heading to market.

In the current climate, the key investor market groups that have a particular focus on Australia’s food and agribusiness industry are:

  • Trade buyers (i.e. established cattle producers seeking to expand or diversify their operations)
  • High net worth individuals
  • Institutional buyers, and
  • Asian buyers, notably from China.

This variety has surprisingly similar motivators although there are some nuances to take into account.

Trade buyers shouldn’t be overlooked

It is sometimes overlooked in the current debate about foreign investment that for many decades Australia farmers have been buying out their neighbours to create larger-scale enterprises.  Indeed over the 30 year period to 2011, there was a 40 percent decline in the number of Australian farm businesses. (Source: ABS)

The top 25pc of agricultural businesses, as evidenced by Australian Bureau of Agricultural and Resource Economics farm performance data, significantly outperform the rest of participants. This has allowed these businesses the opportunity to become major enterprises, often within one generation, and take a seat at the table when deals emerge.

The four outback cattle and transport families comprising Viv Oldfield, Tom Brinkworth, Sterling Buntine and Malcolm Harris who emerged to bid against Gina Rinehart, and her Chinese business partner, Shanghai CRED, in the battle for Kidman are prime examples of this in play.

This trend is expected to continue, with these entities also having the opportunity to partner with other investor groups seeking their management expertise.

The influence of institutional investment is growing

There is generally universal buy-in by institutional investors to the food and agriculture investment thesis with the key drivers being food security and/or raising middle class in Asia and changing diets.

In the current investment environment with global uncertainty, negative interest rates, values for other asset classes at the high end, the returns offered by agriculture are compelling.

Further agricultural investment offers important diversification for portfolios.  For one there is currently not a lot of agricultural investment in portfolios and  in cases where the majority of other assets may have volatile and fluctuating values, agribusinesses are often either stable or have prices that are moving in the opposite direction. This negative correlation means they’re a valuable consideration for portfolio attention, and reinforces their status as a point of diversification.

The current challenge for institutions investing in agriculture is implementation. There have been limited investment opportunities available. It is currently easier to put money to work in infrastructure, real estate and private equity which offer trillions of dollars worth of opportunities, and have established and familiar investment structures – something that agribusiness can’t yet boast.

As agriculture becomes a more attractive opportunity for investment in the coming years, investment managers will develop and begin to provide this much needed supporting infrastructure.

A further challenge for institutional investment in agriculture is that since the Global Financial Crisis the bar for institutional investment generally has risen dramatically.  Investment decisions now involve the investment team, legal team, compliance team, regulatory team, investment committee, and Environment Social and Corporate Governance team.  Decision making is very complex and there are a lot of reasons not to make an investment.

As investors find ways to overcome the challenges in the coming years, the prediction is that there will be an increased focus on agribusiness as a viable option for institutional investors. However, there is significant competition for investor attention and potential agribusiness investments need to fight for their place in portfolios.

High Net-Worth Individuals are buying the agricultural investment story

The motivators for institutional investment are often similar to those that drive high net-worth investors’ increased interest in Australian agriculture. Cases in point include London billionaire Joe Lewis taking control of AA Co, Gina Rinehart’s bid for Kidman, and the speculation that Kerry Stokes and Lindsay Fox are looking for further agricultural investment opportunities in Australia.

Chinese investors are not that different to other investors

The Chinese are renowned around the world for being astute business people. Their interest in Australian agriculture is primarily motivated by strong commercial fundamentals.

In a country where businesses are able to raise equity capital on a much cheaper basis, Chinese businesses can have a low cost of capital that becomes a strong competitive advantage. Factors being considered by Chinese companies in the deployment of this capital in Australian agriculture include:

  • Favourable macro-economic conditions
  • Risk diversification
  • Exposure to increasing land values – As the land on which the businesses are situated on grows in value, so does the investment as a whole
  • Expectations of productivity improvements – agribusiness in general is growing more technologically advanced as businesses find a place for drones, data analytics and other improvements
  • Opportunities to fully develop businesses from having access to capital
  • Opportunities to value add by providing knowledge of market segments and distribution channels in the growing Chinese market, but on the basis of highest and best use throughout this journey
  • Australia is a primary source of “clean and green” food products
  • The China-Australia Free Trade Agreement will ensure China remains our largest trading partner with a value that is more than double our second most valuable partner. As both Australia’s largest source of imports and exports, China has a longstanding commitment to buying our resources and investing in the associated businesses.

These factors mean many Asian investors have a positive sentiment of Australian agricultural investment and its potential for long term return.  However, this is to be balanced with the perceived lack of clarity associated with Australia’s Foreign Investment Review Board laws in this particular industry.

There is no single secret ingredient that maximises the prospect of completing transactions with an Asian investor (particularly from China). The macro-economic conditions are well understood by both parties, and do not aid those prospects. Instead, parties will need to understand the investor’s intentions in much more granular detail, and this may sometimes involve throwing away one’s own usual perceptions as to the motivation behind the investor’s move.

It is likely to be to a business owners’ advantage to understand the reasons investors look to the Australian food and agribusiness industry before they begin the investment process, as this will give them a better idea of who might be looking to invest and what they can do to better position their assets.

It is also important to bear in mind that the agricultural investments sales process can take considerable time, but the rewards from patience can be significant.

The Kidman sales process, for example, is likely to take nearly two years to complete but is likely to deliver a price significantly above original market sentiment.

 

 

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Comments

  1. Dick Morgan, 11/11/2016

    The northern part of Australia is crying out for development. Massive investment is required in large-scale infrastructure – roads, rail, bridges, dams, shipping ports, air ports. And, above all else, new state-of-the-art export meat works, boning rooms, freezers, yards, feed lots and all the associated facilities..

    In the distance past governments have spent large sums of money on improving roads under the “beef roads scheme”. Private equity, together with some foreign money, has been spent on upgrading some of the coastal export meat works. But nothing has been spent on building meat works in the central and regional parts of northern Australia where the cattle are.

    Many years ago there was an abattoir at Tenant Creek. Long since gone. AA Co has built a new abattoir near Darwin but this is a very long way from where large numbers of cattle are. There is probably a need for at least three new abattoirs at strategically placed locations together with all the associated infrastructure to get the cattle there and to transport the product to the shipping ports.

    I would hope that Mrs Rinehart and her Chinese partner will have this in mind and expand their investment in the Kidman purchase into meat processing for export.

    It’s not just meat production from this part of Australia that can be developed for export markets. There’s a whole range foodstuffs that can be grown and processed for export – grains, pulses, fruits etc.

    Private equity and institutional investment is obviously a source of capital for this sort of enterprise. But very often this investment is looking for short term reward and until recently has not been prepared to be patient for the long term. There are some signs that this may be changing.

    In partnership with Australian management and Australian majority control I can see no reason why Chinese capital should not be encouraged to make these long term investments in Australian meat production and in food processing and agriculture.

    Established cattle producers seeking to expand will always be a part of this story. High net worth individuals will appear from time to time. The superannuation funds and institutions generally will always weigh up the risk/time/return factors.

    The growing Chinese middle class with purchasing power and a newly acquired taste for a western style diet will be the driving force for this growth.

    To be successful in China requires a strong association with a Chinese partner. Not a State controlled Chinese entity. A private enterprise Chinese partner. That’s what the Hancock partnership has.

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