What the CPC management buyout tells us about Australian agriculture

An MBO led by Guy Hands, whose Terra Firma owns CPC, shows the lack of interest from other corporate farmers in the portfolio – but Hands and CPC management should be applauded for re-investing.

One of the most prolonged sagas in recent Australian agricultural property sales appears to be nearing an end, with the announcement this week that the future of Consolidated Pastoral Company is set to be resolved with a management buy-out.

The MBO will be led by Guy Hands, the founder and chairman of UK-based Terra Firma, the private equity firm that owns CPC via one of its funds. Hands and his family will provide a cornerstone commitment with CPC management set to participate alongside them in the buyout.

So what does this tell us about investment in Australian agriculture?

First, having scale of CPC’s level can be a double-edged sword – Terra Firma added to the CPC portfolio after acquiring it in 2009 and increased its value through investment, and looks set to deliver a decent return to investors in its fund now. Much of that value has been created because of the scale the business has been able to leverage.

However, it meant that when it came time to sell, there were very few, if any, buyers who could realistically acquire the entire portfolio at the price Terra Firma wanted.

Second – and without being privy to the ins and outs of CPC’s individual assets or the negotiations that went on around them – more than one market source pointed out to us that most corporate farmers in Australia are currently in buying mode. Which begs the question: why have they not snapped up more of CPC’s portfolio, if not the whole lot?

There is that question of scale as mentioned before, but most of CPC’s largest and seemingly most valuable properties remain in the portfolio and will be taken on in the buyout. And African swine fever presents a large upside to beef and other non-pork protein production in the coming years, as we’ve reported and as one further market source pointed out to us again.

But drought is likely the other factor here.

CPC’s properties are all located in Queensland and the Northern Territory and will have been affected by the dry conditions to some extent. One market source told us that the properties have “had a pretty tough run with well below normal wet seasons,” which has likely contributed to the lack of interest at the price Terra Firma required.

At the other end of the scale, the properties also suffered damage from the effects of extreme floods in Queensland earlier this year.

All this suggests, not unreasonably, that other big players like Macquarie, QIC, Hancock or even the large Canadian pension funds, examined the properties and felt they could not generate the required returns based on the price that Terra Firma was asking for them – reported to be around A$1 billion ($677 million; €614 million) for the whole portfolio.

CPC did not wish to comment beyond its statement announcing the MBO.

A more favorable reading of the situation, though, would applaud Hands and the CPC team for being willing to put their money where their mouth is and back the business themselves. They don’t see the situation as so bad that they need to accept a price below what they wanted to get.

Yes, the location of CPC’s properties mean they come with climate risks that are higher than in other portfolios, but patient capital (as CPC chief Troy Setter mentioned in his statement this week) has a role to play in seeing these assets through volatility and trying to secure solid returns over the long term – which is, after all, what investing in farmland is really all about.

What’s more is this result offers Australian institutional investors, who have previously  made noises about investing in domestic agriculture, another chance to take a stake in the country’s largest privately-held beef producer, without taking on all the risk themselves.

Whether any take the chance will be telling.

Write to the author at daniel.k@peimedia.com