HPP, formerly Buderim Group, to be shelled through $33m MacFarms macadamia business sale

Brisbane-based Health and Plant Protein Group (ASX: HPP) will become a shell of its former self after striking a deal for the US$23 million ($32.9 million) enterprise value sale of its macadamia nut business to MNP Holdings LLC in the USA, putting the end in sight for a restructuring saga that cracked the former Buderim Group in two in 2020.

The business appeared rejuvenated in late 2020 following the $13 million sale of its ginger and tourism business assets, and a rebrand tailored to its strength in macadamias with the Royal Hawaiian Orchards (RHO) and MacFarms brands, which prior to that change had accounted for 60 per cent of the Buderim Group's sales.

In its first financial year as HPP however in FY21, macadamia sales were down slightly and losses ballooned from $2.5 million to $10.6 million. Ongoing challenges prompted a strategic review of HPP's cornerstone Kapua Orchard and facility in Hawaii, and by the end the end of FY22 revenue was back at FY20 levels and the group recorded a $685,000 net profit after tax (NPAT).

Despite this rebound in performance against the backdrop of a difficult market, shares have dwindled from 33cps in February 2021 down to 5.5cps today, giving HPP a market capitalisation of just $6.88 million.

Today's announcement highlighted larger structural issues at play that have worked against the Kapua Orchard, namely that it is isolated and on a slope with volcanic rock covering the ground where the macadamias are grown. In a sector that has mechanised in developed countries to remain competitive, this form of harvesting has been described by HPP as "impossible" on its farm without significant investments in rock crushing and clearing.

The onset of COVID-19 exacerbated this existing challenge further by making it even harder to obtain hand-picking labour - a problem that has persisted for several years in the agricultural sector globally. Rising logistics and energy costs have affected the macadamia processing facility, and since December 2022 there have been two volcanic eruptions on the same island, one of which has resulted in hazardous air quality that could affect MacFarms' harvest program.

Even before those eruptions, at the company's annual general meeting (AGM) in November executive chairman Albert Tse offered a pessimistic outlook for the company and outlined progress in plans for a sale.

"The premium nut category is challenged due to broader macro conditions and our competitive advantage of vertical integration has not realised benefits due to global macadamia pricing being materially lower than we have realised historically. Yet we do not see this situation changing in the near term," he said at the time.

"The board has therefore concluded that it is willing to consider a wider strategic scope including merger and acquisition options for the entire company. I can inform shareholders that we are currently engaging with a number of potential parties on a non-binding and confidential basis and will update shareholders if anything changes."

Around two months later, those plans are coming closer to fruition. But why such a discrepancy between the purchase price and HPP's market capitalisation? 

Of the US$23 million that Wyoming-based MNP will pay HPP if the deal goes ahead - technically to acquire the US subsidiary that is a holding company for MacFarms LLC - almost half that amount will be used to repay an American AgriCredit facility, AUD$10 million will go towards convertible notes, and money will need to be put aside as well for employee entitlements and costs, and withholding tax obligations to be determined by the Internal Revenue Service (IRS) in the US.

If everything goes to plan, HPP hopes to be able to distribute between $4.9 million and $7.4 million to shareholders.

Tse said the financial outcome of this transaction was lower than what the board originally expected, but the agreement reached today was "superior in both valuation and structure and allows HPP to exit our US business in its entirety without onerous contractual conditions".

Given HPP does not have the funds to invest further in the MacFarms business, and in light of higher production costs and falling macadamia prices globally, the board believes the proposed transaction is in the best interests of shareholders.

If the sale goes ahead, HPP will become a listed vehicle without any debts or liabilities, making it "well positioned to identify potential opportunities to create further shareholder value, including by way of acquisitions, equity investments or strategic combination opportunities".