Navis Capital sees $40-$80M capex for Mainland Poultry

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Navis Capital, a private equity firm with about US$5 billion (NZ$7.2b) of investments, says there would be between $40 million and $80m of capital expenditure required for Mainland Poultry, building a company with export opportunities and with the potential to go public down the track.

Phil Latham, a Sydney-based partner at Navis, said he has to be a little circumspect in commenting on Mainland, after his firm agreed to acquire a controlling stake in the company, because the deal still requires Overseas Investment Office approval, a process expected to take at least three months. But he talked enthusiastically about Mainland's highly-productive operations and the ability to export its intellectual property as well as its output to other markets in Asia.

He said the laying percentage for Mainland's birds is among the highest in the world and exceeds the average 80 per cent level - the number of birds that lay an egg every day - achieved across Asia. New Zealand had a very high standard of biosecurity and its poultry industry didn't face the perils in Asia such as disease borne by migrating birds. Added to that Mainland had its own feed mill and was focused details such as tweaking feed for the time of year or age of the bird.

"You will not find that same level of focus in a typical Asian bird," Latham told BusinessDesk. "The Kiwi management team is extraordinarily good" and that capability could be exported he said.

"Mainland may well invest in laying businesses elsewhere in Asia using their techniques," he said. "They've not done that because they've been an indigenous business but we believe they can now export New Zealand technology and that's going to add significant value when it's applied."

First, though, Mainland has the capital costs of meeting new welfare rules for its 1.2 million layer birds. It needs to replace equipment to meet the requirements of the Animal Welfare (Layer Hens) Code of Welfare 2012, which calls for the staged phasing out of battery cages in favour of larger colony cage systems or free-range.

"What we would want to do is to quite quickly enable Mainland to make the investment to go from cage to colony (cages) to free-range," Latham said. "We would like to see a very large portion of what Mainland does in five years being free-range and barn. We're very much in favour of the regulations. We think we can be quicker than it has taken in Europe. The current owners couldn't get their hands on the level of capital to do that."

Mainland anticipated the capex would be "a minimum of $40m and could be as high as $70m to $80m". The investment would be a mix of equity capital and third-party lending and Navis "was prepared to bring more than its share of the capital". The details would be subject to the shareholders' agreement.

Navis is no stranger to poultry, with what it calls "significant portfolio investments in chicken and duck operations in the UK, Europe, Thailand and China". In 2016 it sold Golden Foods Siam, one of Thailand's largest exporters of "higher value breaded and roasted chicken products", to Brazil's BRF for an enterprise value of US$360m, having taken a controlling stake in the business in 2009. It teamed up with Rabo Capital in 2013 to sell duck processor Bangkok Ranch for 5.7 billion Thai baht, having bought that business in 2007 for an enterprise value of 4.3 billion baht.

In a statement, confirming the deal, Navis said it planned to "transform Mainland into the pre-eminent agribusiness in the Oceania region with strong export linkages into Asia." Latham said there was latent demand for processed New Zealand eggs from Asian food manufacturers, who would welcome their disease free, and GMO-free status. Processed eggs for the food industry was a side of the business with a large capacity to grow, he said.

Neither Navis nor Mainland founder and managing director Michael Guthrie have released details of the deal but Navis is understood to be acquiring about two-third of the shares for about $300m.

Mainland Poultry produces one-third of New Zealand's eggs, through its Zeagold Foods unit, which has the Woodland and Farmer Brown caged and free-range egg brands, processes eggs products for the food industry, and produces a range of animal feeds through MainFeeds. It operates as a vertically integrated business and the feed unit had been set up as part of that but now sold to other customers and exported.

Asked how long Navis would hold the investment, Guthrie said: "I think Mainland could well be listed on the New Zealand stock exchange in the future." It held Golden Foods Siam for seven years and Bangkok Ranch for six years.

Latham said worldwide there is a move toward food production that ensured animal health and Navis wanted to be involved in the "step-change" in New Zealand.

He also confirmed Navis may be interested in buying Freshmax, the Australian-registered, NZ-based fruit and vegetable producer controlled by Maui Capital that is being marketed by Goldman Sachs.

"We're aware Freshmax is available. We haven't indicated to the parties that we're hot on it," he said. "It may be something we would be looking at appropriately but we haven't said it's an important one for us."

Freshmax had a net profit of $2.17m in the 12 months ended September 30 last year on sales of about $219m. It imports, wholesales and distributes fresh produce including apples, pears, stonefruit, kiwifruit and avocados to a wide variety of countries.
Navis was advised by Ernst & Young and Bell Gully on the Mainland deal. Mainland Poultry was advised by MinterEllisonRuddWatts.