Australian Agriculture Investment

AUSTRALIAN AGRICULTURE INVESTMENT UPDATE SECOND EDITION OCTOBER 2015

WWW.CORRS.COM.AU

INTRODUCTION Welcome to the October 2015 edition of the Australian Agriculture Investment Update, a quarterly publication prepared by Corrs Chambers Westgarth for clients and contacts who are interested in investment activity in the Australian agriculture sector.

This publication provides a brief summary of information about recently announced and completed deals, market rumours and potential opportunities and relevant regulatory updates.

RECENT ANNOUNCEMENTS Further to the report in our first edition available here, Chinese citrus producer Dongfang Modern Agriculture Holding Group recently raised A$39 million from investors and successfully listed on the Australian Securities Exchange (ASX). Dongfang, which specialises in the cultivation of navel oranges, pomelos, tangerines and camellia in China’s Jiangxi Province, is planning to outlay almost A$80 million over the next 12 months to make strategic acquisitions of rural land and camellia orchards in China. The company is also allocating funding toward quality enhancement initiatives such as tree maintenance and soil quality improvements as well as greater production efficiencies across its existing plantations. According to the prospectus, ASX was the stock market of choice for the company due to Australia’s simpler listing process, transparent regulations, low listing costs and enhanced exposure to agricultural business

investment. Dongfang’s listing was well received by the market with shares closing 25% above the issue price on the first day of trading (albeit on relatively low turnover).

ASX-listed Tassal Group Limited, Australia’s largest salmon producer, announced on 31 July 2015 its acquisition of Australian seafood company De Costi Seafoods, one of Australia’s largest retail seafood processors. According to the announcement, the acquisition terms required payment of A$50 million cash at completion together with an earn out up to A$30 million over 3 years. Tassal Managing Director and CEO, Mark Ryan, reportedly said that the acquisition of De Costi “builds on Tassal’s domestic salmon capabilities, and uniquely positions Tassal for its next phase of growth”. The acquisition of De Costi is expected to provide Tassal Group with access to De Costi’s extensive network in seafood procurement along with enhanced scale and national distribution capabilities.

ASX-listed OnCard International Limited, a provider of loyalty, reward and payment solutions, announced on 13 October 2015 that it is undertaking due diligence on a possible acquisition of Tasmania’s The Van Diemen’s Land Company, Australia’s largest milk producer.

Established in 1825, The Van Diemen’s Land Company owns and operates 25 dairy farms and runs approximately 30,000 dairy stock in north-west Tasmania. According to the announcement, the acquisition would be consistent with OnCard International’s new strategy to build an integrated business focused on premium food products. If the acquisition proceeds, it is expected that OnCard International will undertake a capital raising to help fund the acquisition. OnCard International’s announcement follows recent rumours that Chinese investors Herman Shao-ming Hu and Kenny Zhang had made a A$220 million offer to each acquire a 35% interest in The Van Diemen’s Land Company through Hong Kong-based Ryoden Development Limited and Waratah Corporation.

Western Australia’s Minister for Agriculture and Food, Ken Baston, announced on 23 July 2015 that Western Australia’s Department of Agriculture and Food had signed a memorandum of understanding to increase sheep meat exports to China with Chinese importer and distributor Heilongjiang Grand Farm Group, industry group Meat and Livestock Australia and meat processor and exporter V&V Walsh.

According to the announcement, the memorandum of understanding has set an initial goal of seeing sheep exports to China increase by up to 500,000 lambs per year.

Minister Baston has said that the memorandum “marks an important undertaking by industry and government towards continued value chain development, which will increase industry confidence and support farmers to grow their business”. China was the largest

export destination for Western Australia’s A$1 billion sheep industry in 2013-2014, with total exports to China valued at A$53 million.

According to a recent report in the Australian Financial Review, Chinese companies Zibo Shoushan Enterprise Co and Shandong Fusheng Food Co Limited have signed a partnership agreement with privately-owned integrated wine services company Portavin to establish a proposed A$70 million agribusiness precinct in Adelaide.

Portavin’s General Manager of South Australian Operations, Tony Royal, reportedly said that the proposed precinct would involve processing, cold storage, logistics and other operations in one site, making the exporting of premium wine and other products to China more efficient.

The agreement between the Chinese consortium and Portavin comes at a time of rising demand for premium Australian food and wine in China and follows the South Australian Government’s concept to establish a 40 hectare industrial food park in Northern Adelaide.

ASX-listed Seafarms Group Limited (formerly Commodities Group Limited) announced on 7 July 2015 a placement and pro rata non-renounceable rights issue to raise approximately A$16.6 million. Seafarms Group is Australia’s largest producer of farmed prawns, operating over 148 ponds across three locations in North Queensland. The funds raised under the placement and rights issue will be applied to the development of ‘Project Sea Dragon’, a large-scale, integrated, landbased prawn aquaculture project in the Northern Territory designed to produce high-quality volumes for export markets. Project Sea Dragon involves the development of a prawn production enterprise over three stages, covering 10,000 hectares and producing up to 100,000 tonnes per annum. Stage 1 is expected to see the development of approximately

1,080 hectares of grow out ponds, with estimated capital expenditure of US$150 million.

Australian meat processor Bindaree Beef announced in July that it would merge with Australian meat marketing and distribution company, Sanger Australia. As we reported in our first edition, Bindaree Beef was previously in discussions with a number of potential investment partners. According to recent reports in The Australian, the shareholders in Sanger Australia were issued shares in Bindaree Beef, with the scrip merger seeing the creation of the Bindaree Beef Group. The enlarged Bindaree Beef Group is estimated to have annual sales valued at more than A$700 million and intends to operate Sanger Australia as an independent subsidiary. Sanger Australia CEO, Graham Greenhalgh, has reportedly said that the merger will create a vertically integrated part of the supply chain which will allow the Bindaree Beef Group to export its products (including beef, veal, lamb and chicken) more efficiently.

RECENTLY COMPLETED DEALS Chinese dairy group Tianjin Bright & MengDe Dairy recently acquired Victorian grazing property Duncraig.

According to a recent report in the Australian Financial Review, the 364 hectare property was purchased for a reported A$2.5 million. Tianjin Bright & MengDe Dairy Chairman, Madam Yu, has reportedly said that the acquisition of the property will provide the company with greater control over animal import supply quality while assisting the dairy group to secure its supply chain.

Tianjin Bright & MengDe Dairy is a subsidiary of China’s stateowned Bright Food Group, one of China’s largest food and beverage manufacturers.

Chinese retail conglomerate Dashang Group has emerged as the largest single investor in South Australian food and beverage company Beston Global Food Company Limited, which listed on the ASX in August. According to a recent ABC Rural report, Dashang Group’s investment, comprising a 14.9% stake in Beston, also includes a distribution deal between the two companies appointing Beston as Dashang Group’s preferred Australian supplier of premium dairy, meat and seafood products.

Dashang Group, which operates supermarkets and grocery stores across 150 Chinese cities, intends to create Beston-specific sections in its stores to stock and market Beston’s products. Beston’s Chairman, Roger Sexton, has reportedly said that the distribution deal will see Dashang Group purchase at least A$142 million of products over the first two years of the agreement.

Along with its investment in Beston, Dashang Group has been active in the Australian rural property market, acquiring the Hunter Valley’s Glenrock Station earlier this year for an estimated A$45 million.

According to a recent report in the Australian Financial Review, Ontario Teachers’ Pension Plan Board, one of Canada’s largest pension funds, recently acquired a portfolio of almond groves in north-west Victoria from Macquarie Group for a reported sale price of more than A$115 million. According to the report, the sale included 2,878 hectares of agricultural land at Robinvale containing nearly 1,067 hectares of mature almond groves. The sale also reportedly included A$25 million in water entitlements. As reported in our first edition, the Ontario Teachers’ Pension Plan Board’s investment in Australian agricultural land follows the acquisition of two central Queensland cattle properties earlier this year by Canada’s Public Sector Pension Investment Board.

MARKET RUMOURS AND OPPORTUNITIES Chinese dairy company China Dairy Corporation is rumoured to be finalising a planned listing on the ASX in November. According to recent reports, the listing is expected to value the company at A$145 million and will see the company raise up to A$20 million in new funds. The listing is rumoured to form part of the company’s strategy to acquire Australian dairy processing companies and farms in an effort to expand production capacity. Capital markets group BlueMount Capital is understood to be managing the listing.

Australian private equity firm Archer Capital is reportedly selling its West Australian dairy business Brownes Dairy. Archer Capital acquired Brownes Dairy from multinational dairy co-operative Fonterra in 2011 and is reportedly seeking to sell the dairy products processor

for approximately A$150 million.

Brownes Dairy is rumoured to have attracted interest from Chinese conglomerate Fosun and Shanghaibased Bright Food Group. Filipino food manufacturer Monde Nissin and the Japanese-owned Australasian food and beverage company Lion are also rumoured to have shown interest in the proposed sale.

Investment banking firm Luminis Partners is understood to have been managing the sale negotiations.

Australian beef company Australian Country Choice is rumoured to be interested in acquiring unnamed Australian cattle businesses to meet growing consumer demand. The Queensland-based beef company is reportedly holding discussions with unnamed international investors about joint venture opportunities, primarily to support the company’s international expansion plans into

growing consumer markets in South Asia and China. It is understood the company has received interest from both Chinese and Middle Eastern investors. News of Australian Country Choice’s expansion plans follow the company’s recent acquisition of a controlling interest in the Acton Land and Cattle Company, one of Queensland’s largest beef producers. According to reports in the Australian Financial Review, the two companies have also formed a joint venture company Australian Cattle and Beef Holdings, which will lease and manage six of Acton’s Queensland-based cattle properties, including the Millungera Station, Barkly Downs, Moray Downs, Croydon Station, Rugby Run and Iffley Station while overseeing a herd of over 135,000 cattle.

Japan’s second largest trading company Mitsui is rumoured to be looking to enter Australia’s beef export industry at a time of declining coal and iron ore prices. Australia has been Mitsui’s biggest overseas investment destination, with the trading house investing over A$10 billion in Australia’s resources sector over the last decade. Mitsui’s investments have largely been in Queensland coking coal assets and West Australian iron ore projects.

Yasushi Takahashi, Mitsui Australia’s Chairman, has reportedly said that the growth of Asia’s middle class and Australia’s recently completed free trade agreements with Korea, Japan and China is driving strong demand for Australian agricultural commodities, making further investment in Australia’s agriculture sector an area of interest for the company. In addition to considering beef export opportunities, Mitsui is also reportedly committed to growing

its grain accumulation business in Australia.

Further to the report in our first edition, privately owned beef producer S Kidman & Co has been rumoured to be in negotiations with multiple prospective investors to sell its beef producing business for a reported A$325 million. It is understood that three groups are preparing offers for the beef producing business, which are rumoured to include Rifa Australia, a division of China’s Zhejiang Rifa Holding Group Ltd, China’s Ningbo Xianfeng New Material Company and the Shenzhen Stock Exchange-listed vegetable oil producer Donlinks Grain and Oil Company. The strong foreign interest in S Kidman & Co follows reports earlier this year that as many as 12 prospective bidders had been shortlisted for the sale of the company. Kidman’s expansive cattle property portfolio is rumoured to have previously attracted interest

from local pastoral companies Paraway Pastoral, Stanbroke Pastoral and MDH Pty Ltd as well as other foreign investors, including Australia’s European-owned Consolidated Pastoral Company and China’s Bright Food Group.

Chinese conglomerate Shanghai PengXin Group has also been rumoured to be interested in acquiring both S Kidman & Co and Consolidated Pastoral Company with a view to merging the companies to create one of Australia’s largest beef companies, although any such deal would likely be heavily scrutinised by the Foreign Investment Review Board. Consolidated Pastoral Company is one of Australia’s largest beef producers, managing a herd of 375,000 head of cattle across 20 properties while S Kidman & Co manages a herd of 185,000 cattle across Queensland, South Australia, Western Australia and the Northern Territory.

REGULATORY UPDATES White Paper on Developing Northern Australia On 18 June 2015, the Australian Government released Our North, Our Future: White Paper on Developing Northern Australia. The White Paper broadly sets out a policy platform for realising the full economic potential of northern Australia (being the parts of Western Australia, the Northern Territory and Queensland which are north of the Tropic of Capricorn). The White Paper’s key areas of focus include the reduction of barriers to the better use of land and water resources in northern Australia, the creation of a more vibrant investment environment, improvement of infrastructure, the development of a sustainable labour market and improved governance arrangements.

Key initiatives outlined in the White Paper include: •

A$10.6 million to support pilot reforms that broaden economic activity on land;

•

A$200 million to build water infrastructure and the development of secure and tradeable water rights;

•

A$600 million for priority road projects across northern Australia;

•

A$39.6 million to upgrade airstrips and subsidise air services;

•

A$100 million to improve cattle supply chains;

•

A$2.5 million to foster business to business links with Indonesia, Papua New Guinea and TimorLeste; and

•

reform of foreign worker arrangements in high demand areas, reform of the Seasonal Worker Programme and expansion of working holiday visa arrangements.

The White Paper also proposes the establishment of the ‘Northern Australia Strategic Partnership’, a bi-annual gathering of the Prime Minister, Deputy Prime Minister and ministers of Queensland, Western Australia and the Northern Territory designed to provide coordinated leadership to ensure effective implementation of the White Paper.

Each key area of focus identified in the White Paper will be subject to a two, five, 10 and 20 year implementation plan respectively.

The Deputy Prime Minister will be responsible for working with Commonwealth Ministers to implement the actions outlined in the White Paper and will report to the Australian Parliament on implementation progress annually.

Agricultural Competitiveness White Paper On 4 July 2015, the Australian Government released the Agricultural Competitiveness White Paper. The White Paper, which was developed in consultation with farmers, exporters, business and consumers over an 18 month period, will (if fully implemented) represent a A$4 billion investment in Australia’s agricultural industry.

The key initiatives proposed in the White Paper include: •

A$11.4 million over four years to boost the Australian Competition and Consumer Commission engagement with the agricultural sector;

•

A$13.8 million for a two-year pilot programme to provide farmers with knowledge and materials on cooperatives, collective bargaining and innovative business models;

•

funding for Productivity Commission inquiries into

reducing regulation in Australian agriculture and the marine fisheries and aquaculture industries; •

A$500 million for developing Australia’s water infrastructure; and

•

A$30.8 million to break down ‘technical barriers to trade’.

According to a recent statement released by the Minister for Agriculture and Water Resources, Barnaby Joyce, many of the initiatives outlined in the White Paper have already commenced.

Funding has been delivered for key drought funding initiatives and pest eradication measures, while farmers have access to immediate tax deductions for fencing, water infrastructure and fodder storage assets.

Feeder and Slaughter Cattle Health Protocol On 13 August 2015 China’s Agriculture Minister Zhi Shuping countersigned a landmark feeder and slaughter cattle health protocol with Australia, paving the way for live cattle exports from Australia to China. The agreement, which was earlier signed by Australia’s Minister for Agriculture and Water Resources, Barnaby Joyce, leaves Australia as the only country to have negotiated access for live cattle exports to China. According to Minister Joyce, the agreement could be worth as much as A$2 billion a year to the Australian economy with exports expected to commence later this year. The agreement comes at an opportune time for Australian cattle exporters following Indonesia’s recent decision to reduce Australia’s allocation of available cattle permits.

China-Australia Free Trade Agreement On 22 October 2015, Australia’s House of Representatives voted to pass the enabling legislation for the China-Australia Free Trade Agreement (chAFTA). The vote, which followed agreement between the Australian Government and the Federal Opposition on foreign labour arrangements, will see the legislation progress to the Australian Senate. The legislation is expected to pass the Senate in November, which would enable chAFTA to come into force by the end of the year.

Upcoming foreign investment changes As reported in our first edition, Australia’s foreign investment legislation is currently being redrafted. The draft legislation is currently before the Australian

Parliament for debate. We will provide a further update on any key changes impacting agricultural investments once the legislation has been passed.

In the meantime, and as foreshadowed in our first edition, foreign investors should be aware that from 1 July 2015 any existing or newly-acquired interests in agricultural land (regardless of value) now need to be registered with the Australian Taxation Office at: https://www.ato.gov.au/general/ Foreign-investment-in-Australia/ agricultural-land-register/.

All existing interests held by foreign persons must be registered by 31 December 2015, while newly acquired interests must be registered within 30 days of settlement / commencement of lease.

OUTLOOK Deal-making in Australia’s agriculture sector looks set to continue, fuelled by the weak Australian dollar, Australia’s free trade agreements with Japan and Korea which both came into effect in the last 12 months and the expected commencement of chAFTA later this year. The deals summarised in this edition reflect an increased appetite for aggregation and joint venture arrangements, primarily to take advantage of favourable market conditions and to increase scale to service rising demand from Asia.

The two White Papers are a clear sign that improving Australia’s global competitiveness in

agriculture is a priority for the Australian Government.

The implementation of the recommendations in the White Papers will help drive further local and international investment in the sector.

As we explained in our first edition, the success of Dongfang’s ASX listing may also help pave the way for further foreign agricultural listings, particularly from China.

The rumoured listing of China Dairy Corporation in November is further evidence that the ASX is becoming a viable alternative for Chinese agriculture companies seeking foreign capital.

The deals summarised in this edition reflect an increased appetite for aggregation and joint venture arrangements

SYDNEY 8 Chifley 8-12 Chifley Square Sydney NSW 2000 Tel +61 2 9210 6500 Fax +61 2 9210 6611 MELBOURNE 567 Collins Street Melbourne VIC 3000 Tel +61 3 9672 3000 Fax +61 3 9672 3010 BRISBANE ONE ONE ONE Eagle Street 111 Eagle Street Brisbane QLD 4000 Tel +61 7 3228 9333 Fax +61 7 3228 9444 PERTH Woodside Plaza 240 St George’s Terrace Perth WA 6000 Tel +61 8 9460 1666 Fax +61 8 9460 1667

WWW.CORRS.COM.AU 14450696