Costa Group shares lift as US sustainable food fund invests $161m

Wet weather continues to weigh heavily on the fortunes of Australia's largest vertically integrated fresh produce company Costa Group (ASX: CGC), but today it is seeing a spot of sunshine with US-based sustainable food chain fund Paine Schwartz Partners acquiring a 13.78 per cent stake.

During its after-market acquisition yesterday, Paine Schwartz indicated to investors via its broker that it planned to obtain an interest of up to 15 per cent in Costa Group at a price of $2.60 per share.

A notice of substantial holder published this morning indicates new investor spent approximately $161 million on its initial stake, prompting a 9 per cent lift in the CGC share price today at the time of writing.

The investor is however not so new to Costa - under its former name Paine + Partners, it was a majority owner of the company prior to its 2015 initial public offering (IPO) on the ASX, having taken its first equity stake in 2011. Upon listing it held 12.4 per cent, but in 2017 sold enough to be below the substantial shareholder threshold. 

The latest investment appears to reflect a broader trend globally of consolidation in the plant genetics space, with fresh produce industry investors, growers and marketers vying for ownership of premium varieties across a wide range of crops, and to a lesser extent improved access to markets and sophisticated farming operations.

In Costa's case, this includes one of the world's leading blueberry breeding programs with varieties such as Arana that are licensed to growers around the globe.

The world's largest berry company Driscoll's, from California, has a minority stake in Costa and it too has been on the consolidation path recently, acquiring the UK's Berry Gardens and Haygrove Africa in June and July respectively. Late last year the world's largest blueberry group, Chile-headquartered Hortifrut, acquired Spanish player Atlantic Blue which also has intellectual property and extensive plantings in Morocco.

Paine Schwartz describes itself as a private equity firm specialising in sustainable food chain investing, and its investments include Monterey Mushrooms and AM FRESH, owner of leading table grapes genetics group Special New Fruit Licensing (SNFL).

Paine Schwartz has been a driving force behind SNFL's push for one of the largest fruit genetics mergers of recent years, with the announcement in March that it would join forces with International Fruit Genetics (IFG) - another company behind many of the premium table grapes you'll spot in supermarket shelves, in addition to a burgeoning cherry variety program.

In today's announcement, Costa reported Paine Schwartz had no intention of making an offer to acquire control of the group, but may potentially be interested in seeking a board seat, subject to Foreign Investment Review Board (FIRB) approval.

Costa shares have been in the doldrums since the surprise resignation of CEO Sean Hallahan which was announced in late September, exacerbated by reports of adverse weather impacting citrus quality, leading to less of what are known as pack-outs, meaning fruit that meets spec and is fit for sale through the main wholesale, supermarket and export channels.

"The effort to produce the crop in challenging conditions has also caused an increase in labour expenditure as well as higher spraying costs in relation to pest and disease control," the company stated in a 17 October update.

"We currently expect full year EBITDA-S for the Group to be marginally ahead of last year’s results. While we do not expect any additional material impact from recent heavy rainfalls experienced across the country, further downside risk is possible if extreme adverse weather continues."