The $190 million cash/scrip takeover offer for honey producer Capilano is pitched at a decent premium but will the suitors have to sweeten the pot?

Will media mogul Kerry Stokes’ support for the consortium lodging a $190 million bid for the honey packer and marketer be enough to get the deal across the line? Through his company Wroxby, Stokes is a 20.6% holder in Capilano and is happy to take his consideration in scrip.

But some pundits reckon that the bidders -- private equity fund Wattle Hill and agricultural investor ROC Capital -- are swooping at an opportunistic time, with the company on the cusp of a golden earnings recovery.

Based on Capilano’s 2017-18 earnings announcement that accompanied the takeover news, the offer of $20.06 a share cash and a cash-scrip alternative values the company on a generous earnings multiple of 19 times. But while earnings fell 4% to $9.8m, broker Cannacord reckons they were well ahead of expectations. On the firm’s expectations for 2018-19, the stock is trading on a multiple of only 14 times after being rerated post the takeover announcement.

“We won’t be surprised to see an alternative proposal emerge,” the firm says.

Select Equities analyst Mark Topy concurs. “We believe the bid has highlighted the latent value in Capilano with its leading market share position and honey supply to expand in the Asian region,” he opines.

“We believe that other parties may identify this value in assessing and launching a possibly higher bid.”

With a circa 70% domestic market share, Capilano presents a rare chance for a buyer to land its sticky paws on one of the country’s best known consumer brands.

Not that the producer is devoid of issues.

This year’s crop is expected to be the highest in a decade, which flies in the face of reports that our bee population is in less than robust health. In other words, there’s an oversupply.

Another negative is that Coles recently decided to stop stocking Capilano’s Allowrie brand, which is sourced from Argentinian and Chinese honey but also contains 30% Australian honey.

The patriotic Coles decided it only wanted local honey, which provided an entree to key competitor Beechworth Honey to increase its private label presence.

Woolworths, however, continues to stock Allowrie, arguing the value product is popular with consumers. Topy estimates the brand accounts for 5% of Capilano’s revenue.

Supply wise, the dry weather is a key X factor. About one quarter of honey comes from Queensland, where conditions have been unfavourably dry.

Manuka honey (a fave of health-conscious consumers) is in especially short supply and Capilano has been relying on Kiwi beekeepers to maintain market share.

Capilano’s full-year results show the company is sitting on a honey stockpile of 6746 tonnes worth $51m, which positions the company if the Big Dry continues. As Capilano chairman Trevor Morgan says: “It’s comforting to have a little more honey in the yard than has been the case in recent years.”

Also, increased supply isn’t entirely negative for Capilano, because it lowers the price for the commodity the company pays to the bee keepers. According to Topy, apiarists now receive an average $4.80 a kilogram, compared with $5.20 a year ago.

But if the drought persists and supply constricts, these prices are likely to rise.

Investors have taken a cautious approach to Capilano because its push into China has been slower than expected. The company has recently moved from a direct approach to more of an emphasis on the Daigou (cross border) channel and the Alibaba and JD.com ecommerce sites. But Wattle Hill is a China specialist with a remit of expanding the brand into offshore markets.

Stokes is obviously confident of the strategy: Wroxby has agreed to take up its entitlement in scrip, which frees up other Capilano holders to accept either shares or the $20.06 cash offer (a 28% premium to the ‘undisturbed’ price of $15.65/sh)

Other holders on Capilano’s tight register  (many of whom are beekeepers) are likely to want to follow Stokes’s lead and maintain an exposure to what’s the bee’s knees of Australian honey.

tim@independentresearch.com.au

Disclaimer: The companies covered in this article (unless disclosed) are not current clients of Independent Investment Research (IIR). Under no circumstances have there been any inducements or like made by the company mentioned to either IIR or the author. The views here are independent and have no nexus to IIR’s core research offering. The views here are not recommendations and should not be considered as general advice in terms of stock recommendations in the ordinary sense.