Source: Tassal Group
On the morning that Tassal Group (ASX: TGR) was slated to report their earnings for FY22, the company released some even bigger news. Tassal announced that the board had unanimously approved a takeover bid of $5.23 per share by Canadian aquaculture company Cooke Inc.
This comes after Tassal announced at the end of June that the board rejected three bids made by Cooke, all within the space of a month. The offers were $4.67, $4.80 and $4.85 per share, respectively. Rather than being discouraged, Cooke doubled down and appeared to have become even more set on acquiring Tassal. Only three weeks later, Tassal announced that Cooke had almost doubled their stake in Tassal, from 5.4% to 10.5%. To us, this signalled that a higher fourth bid was imminent, which we were pleased to see play out.
Tassal was clearly pleased with the offer from a valuation perspective, with the Chairman of Tassal James Fazzino stating that the “Tassal Board believes the revised proposal reflects appropriate long-term value for the business.” CEO Mark Ryan made clear he believes there will be strong synergies from the acquisition, stating that “a future acquisition by Cooke enables Tassal to fast-track our goal to be one of the world’s most transparent and sustainable protein producers.”
Tassal will be able benefit from being able to leverage Cooke’s global distribution network to grow their capabilities, while this acquisition enables Cooke to expand their reach in the global seafood market by entering into the Australian market. This gives Cooke access to Tassal’s significant production assets and also an in-house distribution network that Cooke can integrate into their networks.
There were numerous reasons why we invested in Tassal in the Income Portfolio. At the entry date of 13 December 2021, we believed that the normalisation of living with Covid-19 would support improvements in volumes and pricing for salmon and prawns as hospitality and food service restrictions eased. Additionally, we believed that over the long term, Tassal’s earnings would be underpinned by consumers’ preferences continuing to shift from other animal proteins towards seafood. These shifting preferences are underpinned by a greater focus on health and a growing middle class.
Furthermore, we liked Tassal’s investment in expanding prawn production capacity, which would drive volume growth. This was evidenced by the company’s overshadowed FY22 earnings report, in which prawns sales volumes increased by 70% to 5,696 tonnes. Even with this growth, prawns made up just 11.7% of Tassal’s product mix, with salmon making up the rest (43,075 tonnes). With a key growth pillar of Tassal to make prawn volume roughly 50/50 with salmon volume, there is still a long runway for growth.
Crucially, Tassal has been the last remaining majority Australian-owned major salmon producer. With the growth potential in prawn volume capabilities, and over 43,000 tonnes of salmon, Tassal’s production assets are highly desirable to a would-be buyer. This is due to the growth prospects of aquaculture globally, as limited agriculture land and a slowdown in productivity gains meant that traditional livestock farming and wild-catch fishing would struggle to keep up with the demand for protein. Furthermore, Tassal also has in-house distribution capabilities and strong local demand which would let a foreign buyer hit the ground running in Australia.
At our entry price of $3.35, Tassal had a trailing dividend yield of approximately 4.2%. We believed these factors supporting long-term earnings growth would result in Tassal being able to pay out solid dividends in the long-term, which made it a good investment for the Income Portfolio. We do note that the company didn’t declare a final dividend in the FY22 report, which doesn’t necessarily disappoint us because of the accepted takeover offer.
With Tassal’s main rival Huon Aquaculture being acquired last year, the last remaining significant Australian salmon producer was always a potential to be a takeover target. With Huon being acquired at an implied forward EV/EBITDA multiple of 11.8x, this peer comparison helped strengthen our conviction that Tassal was undervalued at our entry price of $3.35, which gave a forward EV/EBITDA multiple of 6.4x at the time. We believed this dislocation in value would narrow either due to a takeover offer or the market eventually recognising the value of Tassal through its robust earnings profile over the longer term.
With the offer being accepted unanimously by the board, final approval will be undertaken by a shareholder vote in November. This is expected to pass, which will result in Tassal being delisted before the end of the calendar year. With this likely to happen, let’s take a deeper dive into the numbers and what an accepted takeover offer of $5.23 means for shareholders.
This offer represents a 49% premium to Tassal’s undisturbed closing price of $3.52 on 22 June 2022, which was the last trading day prior to reports that an entity affiliated with Cooke had acquired a stake in Tassal. The offer of $5.23 per share gives Tassal an equity value of approximately $1.12 billion and when net debt, lease liabilities and Receivables Purchase Facility is added, Tassal has an enterprise value of approximately $1.73 billion. The implied acquisition EV/EBITDA multiple is approximately 9.9x on Tassal’s FY22 EBITDA of $174.57 million.
ASR Wealth recommended Tassal as a buy for the Income Portfolio on 13 December 2021 at an entry price of $3.35. Including dividends, an exit price of $5.23 results in a total return of 58.5%. We are pleased to see how this investment has played out, and that an acquirer has seen the value that we identified that Tassal had.