NZ Herald business editor at large

Liam Dann: Comvita offer puts buzz back into market

Comvita's is a familiar Kiwi story which sees promising local companies sold off before they have a chance to really fly. Photo / Kenny Rodger
Comvita's is a familiar Kiwi story which sees promising local companies sold off before they have a chance to really fly. Photo / Kenny Rodger

There is a fascinating takeover battle about to unfold on the New Zealand stock exchange.

Singapore-based Cerebos Pacific wants to buy NZX-listed health products company Comvita for about $72 million, or $2.50 a share. Comvita's board has already rejected the bid, arguing it is opportunistic and undervalues the company.

Why is this fascinating, you might ask - particularly if you are not a shareholder?

Well, for starters there is the sport of it. A hostile market play comes as something of a breath of fresh air for business journalists after three years of news lists clogged with grim economic data and finance company fallout.

These things are always lively with spin flying from investment bankers and PR teams on both sides. They can also provide a salutary lesson in how subjectively one set of accounts can be interpreted.

But beyond that - and somewhat more seriously - this bid threatens to unfold as yet another chapter in that familiar Kiwi story which sees promising local companies sold off before they have a chance to really shine.

Comvita dates back to 1974 when founder Claude Stratford recognised the health benefits of manuka honey and started selling a range of bee products from his basement in Paengaroa. It grew slowly at first but was exporting by 1988. It now has annual sales of about $90 million and 470 retail stores - including 400 in China.

As well as manuka honey products it sells a range of olive leaf extracts and flavoured omega-3 fish oil supplements. It has also moved into the lucrative skin care and beauty product category.

As an example of an exporter adding value to a relatively cheap raw ingredient it is doing very well.

A 250g sample of generic unbranded manuka honey is worth about $5 on a supermarket shelf. Branded by Comvita, sourced carefully and sold into the right market that amount of honey can sell for up to $52.

When Comvita uses manuka honey in medical wound dressings - which it does in partnership with a European firm - that same measure is worth $165. When it is transformed into skin care products it leaps to a value of $250 - $1 a gram.

That is undeniably a great New Zealand business story. Comvita ticks all the right boxes as the kind of innovative valued-added export business we need to promote. Well almost all the right boxes.

The company listed in 2005 and, as Cerebos will be pointing out to shareholders, its performance as an investment has been somewhat patchy.

Comvita shares traded at $2.14 when it first floated in November 2003. They closed up 1c at $2.71 yesterday - buoyed by the offer. Before the Cerebos bid they were trading at just $2.10.

At its last annual result, after-tax profit for the year ending March 2011 was $503,000 on sales of $82 million - down from $5 million on sales of $84.9 million the previous year.

Comvita is forecasting an improved net profit of between $7.3 million and $8.2 million for the year to March 2012.

Cerebos is likely to say that the local owners don't have the kind of scale and distribution network to fully capitalise on the great products they have developed.

But Comvita has another story to tell. It will argue that this is a very well-timed bid coming in just as the company finishes a difficult period of investment and repositioning. Comvita is on a growth path and hasn't let the economic downturn divert it from that. It has had an average revenue growth of 17 per cent a year for the past five years.

With forecasts for sales in excess of $91 million in 2012 that puts it on a path to sales of more than $250 million by the end of the decade.

The trouble is that kind of growth story is not always well suited to the New Zealand stock market.

Investors here often don't have deep enough pockets to stick with companies that take longer than five years to deliver good returns.

Comvita is in a difficult position. Unlike more mature companies it has not been able to cut costs and retrench during the tough times.

It has continued to invest in R&D, it has more than doubled its staff since 2005 and, perhaps most significantly, it has been making international acquisitions and investments in order to own its own distribution and sales network in key markets.

It now has control of all aspects of its business from the raw materials to branded retail stores.

Comvita will go to shareholders in the coming weeks with this story and the promise that the company is in good shape to convert revenue to profit. It will say that it is over a major hump with regard to costs.

When local companies are sold overseas the profits go with them and that is a constant drain on the nation's accounts. In this case it is true that Comvita has not been making a lot profit but it looks like a company that will - eventually.

The question is: Do New Zealand investors have the patience or the financial capacity to hang in there until it does?

You can't blame Cerebos for asking the question. But if anything the bid should give investors some comfort that they have backed a company that is doing a lot of things right.

Comvita would be a real loss to the NZX, which needs these exciting growth stories to keep vibrant. It would be great for "NZ Inc" if it remains locally owned long enough to deliver on its promise.

But in the end it is price not sentiment that will determine Comvita's fate. The board is confident that the price offered by Cerebos is not high enough. As a rule shareholders are mugs to accept the first offer in a hostile bid and should always assume that the bidder hasat least one more offer up itssleeve.

There will be an independent valuer's report commissioned which will offer important guidance.

But whether Comvita stays or goes will depend on how much Cerebos wants it and the extent to which shareholders are prepared to rally behind the company's upbeat outlook.

Cerebos is expected to send formal offer documents to shareholders in the next couple of weeks. Watch this one heat up after that.

- NZ Herald

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NZ Herald business editor at large

Liam Dann is business editor at large at the New Zealand Herald. He has been a journalist for 20 years, covering business for the last 14 of them. He has also worked in the banking sector in London and travelled extensively. His passion is for Markets and Economics, because they are the engine of the New Zealand economy. He hosts The Economy Hub video show every Thursday.

Read more by Liam Dann

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