Q2 2020 - (released August 2020)
SA's quarterly Private Equity & Venture Capital magazine
Foxes circle the Quantum Foods henhouse
by Anthony Clark
Not since the heated and acrimonious battle for control of poultry counter Sovereign Foods in 2016 and 2017 have I witnessed such a battle for control of another small food and agricultural counter as has latterly been seen in the frenzy to acquire a stake in small Wellington-based Quantum Foods.
Unbundled from Pioneer Foods in October 2014 into a separate JSE listing, Quantum Foods was the highly cyclical agricultural division housed within Pioneer Foods with interest in poultry, animal feeds and eggs. Brands such as Tydstroom Chicken and Nu Laid eggs were well-known.
As a stand-alone entity, Quantum management, under the leadership of CEO Hennie Lourens, embarked on a highly successful programme to de-risk the business to remove much of the latent earnings volatility.
The poultry abattoir business was sold to Sovereign Foods and Quantum decided to utilise its skills as farmers to focus on day-old chicks and broiler rearing as contract farmers. Contracts were landed with poultry leader Astral Foods, as well as Sovereign Foods.
The sale of the poultry unit removed a significant portion of volatility from Quantum, as its regional brand could not compete against the majors and it didn’t have economy of scale. Today, as a contract broiler farmer, some 40% of earnings are derived from this function and the unit has remained highly profitable, compared to the violent swings seen from its prior poultry meat incarnation.
Another 30% of Quantum’s earnings are derived from its specialist Nova animal feeds business, with niches in poultry feed, dairy and equine feeds, predominantly in the coastal regions.
The only remaining volatile part of Quantum was its national eggs business under the well-known Nu Laid brand, where the company is the only nationwide eggs supplier. It is this remaining 30% of revenue that remains cyclical, tied to the vagaries of input costs and egg supply and demand. Much has been done to reduce the volatility and the huge losses that the business used to generate in down cycles.
It is this very restructuring and positioning of Quantum, tied to its very low JSE PE rating and high Net Asset Value, that drew out the significant interest in the stock that recently emerged.
Long-standing Quantum Foods shareholder, Zeder Investments, owned a 31% stake and was the largest individual shareholder. Zeder gained its Quantum stake from its vast shareholding in Pioneer Foods at the time of the 2014 unbundling. It was always a steady supporter of the stock.
Suddenly, out of the blue and unbeknownst to Quantum management, they sold the 31% stake to unlisted poultry stock, Country Bird Holdings (CBH), on June 12th for 500 cents a share.
Given that Quantum had been trading on the JSE at around 375 cents per share in the days preceding the sudden sale, Zeder gained a healthy premium and walked away with R308 million.
This story gets interesting as CBH, as the Quantum buyer, was also the same party behind the unsuccessful bid for Sovereign foods in 2016/17 which eventually fell to private equity player, CapitalWorks. CBH walked away with a healthy profit.
Questions were raised, as CBH was a rival poultry company to Astral Foods and Sovereign Foods, which has material contracts with Quantum. There were questions as to whether the culture and strategy of CBH and Quantum were compatible. That answer was swiftly answered when Quantum management came out stating that they had acquired a R20m stake in Quantum to bolster their defences against the advances of CBH, paying 650 cents a share.
From a share price of 375 cents in early June 2020, Quantum started to run, and run hard. Other parties were disclosed as having an interest in Quantum and Luxembourg-based agricultural private equity fund, Silverlands, acquired a 32% stake, paying 600 cents a share.
As the Quantum share price reacted to multiple suitors, the share price in mid-July peaked at 1157 cents, some 235% higher than the pre-Zeder stake sale , and in another twist, poultry giant Astral Foods disclosed a surprise 6.42% stake. Astral seemed intent on protecting its supply agreements with Quantum.
So, as it stands, there are seemingly two distinct camps. The original suitor, CBH with 31%, who sits on a healthy paper profit for two months’ endeavours of R150 million, and an alignment of Silverlands (32%) Astral Foods (6.42%) and Quantum Management (8%) who are opposed to a CBH deal.
As I write this article for Catalyst, Quantum Foods is trading at 750 cents a share as the extreme trading frenzy and volumes have died down. We could say that we are at an impasse.
Two competing sides, both with sizable stakes. It’s a game of chicken. Who will blink first?
Whispers suggest the private equity/Astral/management grouping has attained a 51% stake in Quantum. At time of copy, this has not been confirmed.
If correct, CBH will find it difficult to proceed with any intended offer to minorities. Perhaps history will repeat itself? As CBH was unsuccessful with its original Sovereign bid, it sold its stock to the private equity party for a profit. Maybe they will walk away with a much bigger profit this time?
Many foxes raided the Quantum Foods henhouse. Only one will walk away with the prize. The winners have been shareholders who say a R600 million, mostly overlooked agricultural company suddenly thrust into a deal frenzy limelight now has a value of R1.4 billion. The story is not yet over, but the easy money has indeed been made for those that held shares in what are now golden eggs.
Clark is an independent analyst at Smalltalkdaily Research