Takeover target Costa Group: Keen bidders or a big short?

2023 has seen its fair share of failed takeovers including Albemarle’s bid for Liontown Resources (ASX: LTR) and Brookfield's run for Origin Energy (ASX: ORG).

As the takeovers fell through. So did the share price. In the short term, it’s been a value destructive experience for investors, traders and especially arbitrage seekers. 

Fruit and vegetable grower Costa Group (ASX: CGC) said on Monday it expects full-year 2023 earnings to be lower than 2022, falling short of prior expectations for growth.

In this piece, I’ll recap how the Liontown and Origin bids unraveled as well as the new complexities faced by Costa Group. 

Keen Bidders Hit a Wall 

Albemarle terminated its plans to acquire Liontown on 16 October, citing the “growing complexities” with progressing the transaction – Namely Gina Rinehart’s blocking 19.9% stake in the company.

Before walking away, Albemarle had made four bids:

• 4 September 2023 – $3.00 per share

• 28 March 2023 – $2.50 per share

• 3 March 2023 – $2.35 per share

• 20 October 2022 – $2.20 per share

Interestingly, short interest in Liontown climbed to record highs of 10.01% just three days before Albemarle’s walk out.

Liontown shares closed at $1.33 on Monday, 12 December. 

Origin had a similar story except the takeover bid was rejected by major shareholders AustralianSuper. The consortium led by Canada’s Brookfield had placed three prior bids including: 

• 21 November 2023 – $9.43 per share 

• 2 November 2023 – $9.53 per share

• 22 February 2023 – $8.90 per share

• 10 November 2023 – $9.00 per share

It’s worth noting that the bid had a US dollar component which appreciated significantly between February and October.

Origin shares closed at $7.80 on Monday, 12 December.

Costa’s Potential Buyout

Costa received a non-binding takeover bid of $3.50 per share on 4 July 2023 from Paine Schwartz Partners (PSP).

PSP already acquired an 13.78% interest in Costa on 25 October 2022 at a price of $2.60 per share and confirmed verbal engagements back in April to a potential approach priced at $3.20 to $3.30 per share. 

The $3.50 bid represents a 34.6% premium to the $2.60 price and an 18% premium to Costa’s close on 3 July 2023.

PSP revised its offer price two months later on 18 September to $3.20, noting that this was its best and final price.

The offer reduction took place after an underwhelming first-half result from Costa, which flagged a “deterioration in late season 2PH fruit quality and southern region volume and fruit size downgrades are currently estimated to have a circa $30m impact on full year EBITDA-S.”

The Trading Update

On Monday, Costa downgraded its 2023 earnings expectations to below 2022 levels, missing previous growth expectations. 

“Costa expects this period to be impacted by a continuation of unfavourable impacts from adverse weather conditions in late CY22 and early CY23 in the citrus category,” the company said in a statement.

More favourable growing conditions on the east coast is also expected to deliver significant volumes in categories such as berries and tomatoes, and place downward pressure on industry prices.

Why it Matters

Costa’s scheme implementation agreement with PSP includes the condition: “No material adverse effect to Costa including a reduction in consolidated net assets or consolidated annual EBITDA-S beyond specified thresholds.”

Costa has yet to specify the extent of its earnings downgrade. The announcement only states expectations that “full year EBITDA-S result to be below CY22.”

A $30 million impact was already flagged during the first-half result in August.

“However, we believe clarification regarding citrus improves the probability of a deal occurring with PSP likely having a through the cycle view on CGC and should look through short term seasonal issues,” Macquarie analysts said in a note dated August 31. 

Are the new headwinds incremental (e.g. another $10 million) or something outrageous (e.g. a $100 million hit)? In the instance of an outrageous earnings downgrade – Could PSP lower the bid price (which they’ve done before). 

Costa is currently trading at $3.04 or 5.3% discount to the current standing $3.20 takeover price. Does the arbitrary opportunity still stand? Or will Costa’s share price unravel like the other failed bids?