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Costa faces earnings downgrade, Paine Schwartz eyes lower offer price

Judging by the earnings downgrade issued by Costa Group (ASX:CGC) yesterday, its US suitor, Paine Schwartz, might have been considering another cut to its offer price, in addition to the one inflicted in September.

That’s when Paine Schwartz Partners and its partners cut 20 cents a share from its takeover price, reducing it to $3.20 a share, with the total value reduced by $100 million.

(Paine Schwartz specialises in agribusiness and food chain buyouts. The bidding group also includes Californian berry group Driscoll’s Inc and the British Columbian Investment Management Corp.)

The cut was made after two months of due diligence, accounting for Costa’s weaker profit outlook, and a $30 million hit from adverse weather conditions. Judging by yesterday’s announcement, the impact from unfavorable weather is even more significant than anticipated.

In an update on the bid timing (for Scheme of Arrangement meetings and the release of the target statement and the independent expert’s report and valuation – the $3.20 a share is OK), Costa revealed that the weak trading conditions from the September update continue, with the added bad news that the return to good growing conditions has resulted in a flood of summer fruit and vegetables, leading to lower prices and returns. Consumers are also cutting back on spending due to weak economic conditions.

In line with the bid’s terms, which state that any dividend comes off the offer price, the weak trading outlook has made it easy for Costa directors to abandon the idea of a final dividend for the 2023 year.

The Independent Expert has concluded that the Scheme is fair and reasonable and, therefore, in the best interests of Costa Shareholders in the absence of a superior offer.

The Independent Expert assessed the value of Costa shares on a controlling interest basis to be in the range of $2.62 to $3.28. “The Scheme Consideration of $3.20 per Costa Share falls within this range,” Costa directors helpfully pointed out.

This news led Costa directors to once again unanimously recommend that Costa Shareholders vote in favor of the Scheme in the absence of a Superior Proposal and subject to the Independent Expert continuing to conclude that the Scheme is in the best interests of Costa Shareholders.

The trading update, however, was the bad news, and without the underpinning of the $3.20 offer, one might wonder where the Costa share price would be after the latest adverse news.

Costa said in its August update that it expected the full year Calendar Year 2022 (CY23) EBITDA-S to be above the CY22 result. That’s now not the case.

“With the knowledge of actual trading since August 2023, including the finalisation of both the northern and southern citrus crops and Costa’s current outlook for the remainder of CY23, Costa now expects the full-year EBITDA-S result to be below CY22.

“While the remaining period of CY23 includes significant trading across both the Produce and International segments, Costa expects this period to be impacted by a continuation of unfavorable impacts from adverse weather conditions in late CY22 and early CY23 in the citrus category, which includes the CY23 Queensland table grape crop.

“In addition, the more recent favorable growing conditions on the Australian Eastern seaboard are expected to deliver significant industry volumes in Costa’s berry and tomato categories. When combined with a significant change this year in Australian consumer sentiments influencing purchasing behavior because of current economic conditions, forecast pricing in Costa’s produce segment is expected to be below Costa’s previous expectations for the remainder of the calendar year.”

In other words, there will be an abundance of tomatoes and berries (as a trip to the greengrocer will confirm) at prices the company will struggle to profit from as consumers cut back on their spending, especially on berries, which are now seen as luxury items for many.

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