From Davy stock brokers6 Oct 2016 09:23
We view Fyffes’ entrance into the North American mushroom market as a positive development. Fyffes has invested c.€140m to build out its fourth product category, which is forecast to add c.26% to EBITA on a pro-forma basis. The mushroom category has displayed good value and volume growth in North America and has favourable investment characteristics that appear defensible. We believe Fyffes has acquired high quality, scarce assets in an attractive industry via its investment in Highline and All Seasons.
Highline and All Seasons acquisitions make Fyffes a scale player in North American mushroom market
On April 1st, Fyffes acquired Highline Produce – the largest mushroom producer in Canada. It paid CAD$145m (€98m) to acquire the company, which equates to 8.1x pro-forma EBITDA of CAD$18m (€12.2m). On September 8th, Fyffes acquired All Seasons – a mushroom producer in Western Canada. Fyffes paid CAD$59.1m (€41m) based on a 7.5 times multiple of its 2015 reported EBITDA of CAD$7.8m. On a pro-forma basis, the acquisitions are forecast to add c.26% to EBITA.
The combined volumes of Highline and All Seasons will make Fyffes the clear market leader in Canada and one of the largest producers in North America. Also common to both businesses is the scope to produce premium and organic mushrooms via ‘Dutch-style’ growing systems with full integration in composting and substrate.
Attractive industry characteristics
The North American mushroom market has a number of attractive investment characteristics. The market for fresh mushrooms in Canada has grown 36% in volume terms since 2011, while the US market has grown volume by c.15% over the same period. There has also been moderate price inflation in the category over the past five years. The North American mushroom market is highly consolidated at both grower and retail level, and there appears to be capacity discipline among the market participants. Barriers to entry are high due to the large capital investment required for greenfield production, making the sector unattractive to new entrants – it makes more sense to buy an existing player than to build new capacity. Vertical integration across all phases of production allows Fyffes to capture producer and distributor margin – an approach that is similar to that taken in its melon and pineapple categories.
Equity raise signals appetite to grow further
On September 16th, Fyffes placed approximately 31.45m shares at €1.50/share (c.10% of the shares outstanding prior to placing) to maintain balance sheet flexibility for future growth opportunities in both its existing and new product categories.
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