By Intan Eow (Partner), Kenny Cheok (Solicitor), KWM Sydney
Australia’s clean, green and natural food and agribusiness sector punches above its weight, producing enough food to feed approximately 60m people when its current population is just over 25m. More than half of Australia’s food exports land in Asia (A$32bn out of a total of A$49bn in 2017-2018), including its single largest export destination, China (A$11.8bn). Total foreign investment approvals in the agricultural sector increased year on year from $2.5bn in 2014 to $7.9bn in 2018. Of these, China is the second largest foreign investor, with $1.6bn agricultural investments in 2017-2018.
In this article, we share some observations on the recent mergers and acquisition trends in this sector and highlight some potential opportunities. Climate is a key theme.
Australia’s climate has undoubtedly played a pivotal role in driving activity in the food and agribusiness sector. The widespread prolonged drought in Australia which continues to 2019 has affected various sub-sectors to varying degrees. For example, the profitability in the dairy sector has been impacted by increased feed and water costs, driving dairy farmers to exit. The severe drought and high feed costs greatly contracted the supply of finished lambs, but when combined with strong international demand, resulted in record breaking lamb prices. Interested investors would do well to study the different impact of the climate on the various sub-sectors to assess the potential investment opportunities.
Scarce water as good as gold
In Australia, the right to access water is a statutory right governed by differing legislative schemes in each State and Territory. In most jurisdictions, water rights are distinct from the land with which they are connected, and can be traded separately from the land in a sophisticated water trading market.
No wonder water has emerged as a separate investment class on its own with specialist investment vehicles in water entitlement. Vendors in property sales are also more inclined to retain their precious water entitlement which continues to appreciate in value. So much so that the water entitlement prices in the Murray Darling Basin (MDB) region has doubled in less than a year, magnifying the water shortage issue for the farming communities. This development has prompted an Australian Competition and Consumer Commission (ACCC) inquiry into the MDB water markets, in response to the pressure from the regional communities which are claiming that ‘non-farming investors’ have driven up water prices in the region. Depending on the ACCC’s findings in its final report due on 30 November 2020, investment activities in the region (whether in the grower, water trading markets or otherwise) may have to take cue from any federal policy that may be put in place to address the situation in the MDB.
Competitive sale drives agricultural land acquisitions
High quality Australian food and agribusiness assets have featured in a large majority of deals structured as competitive sales, hotly contested by multiple bidders.
These competitive transactions are consistent with the Australian government’s foreign investment policy that, subject to some exceptions, a foreign person proposing to acquire an interest in agricultural land that will be used for primary production or residential development must demonstrate that the interest has been offered for sale publicly in an open and transparent sale and process, and ‘widely marketed’ for a minimum of 30 days, giving Australian investors an opportunity to acquire that interest.
This consideration is relevant where foreign investment approval (commonly known as FIRB approval) is required for the acquisition of an interest in agricultural land where the purchaser is not a foreign government investor and the acquisition is valued at A$15m or more, applied cumulatively (including for investors from China, Japan, Singapore and South Korea).
Strong showing by cashed-up PE investors
Where there are competitive auctions, there are cashed-up private equity investors. Interest from such professional investors in Australian food and agribusinesses remains robust. In one of the more recent headline transactions we acted on, the contested auction process for Campbell Soup Company’s international brands division, KKR was the eventual winner and has signed a deal to acquire the US food giant’s international brands for an enterprise value of approximately US$ 2.2bn.
PE investors, often with diversified portfolios and plenty of firepower, are regarded by local food and agribusinesses as a viable exit option.
Quiet rise of patient capital from foreign pension funds
Among the financial investors, we witnessed the quiet rise of foreign pension funds. The House Standing Committee on Agriculture and Water Resources reported that the level of investment in Australian agriculture by overseas pension funds especially from USA, Europe and Canada, is significant, with such funds allocating more than 1 percent of total assets to agriculture in Australia and internationally. Indeed, Canada, driven by its acquisitive pension funds, became the top foreign investor in Australia’s agriculture, forestry and fishing sector for 2017 to 2018, spending $2.6bn on acquisitions and investments.
For example, Canada’s Public Sector Pension Investment Board (PSP) recently bought a majority stake in one of Australia’s biggest grains growers, BFB at Temora, from US PE firm Proterra Investment Partners. This was hot on the heels of PSP’s earlier consortium acquisition of agricultural and water assets from Webster and many others.
The longer-term investment horizon of patient capital such as pension funds which could afford to ride through the troughs could potentially prove to be the very antidote for the impact of the harsh Australian climate on the sector.
Despite challenges from prolonged drought conditions, Australia’s food & agribusiness targets continue to attract investors, if you know where to look. We would be pleased to continue this conversation with you.
 Higher agricultural land thresholds apply for investors from Thailand, Chile, New Zealand and United States under the applicable free trade agreements. Any acquisition of an interest in land by a foreign government investor must be notified.