Investment Matters

Patties Foods' takeover proposal

When it rains, it pours.  So goes the expression.  Last time it rained like this was Jul-15, which included the Energy Developments takeover offer from DUET.

Patties Foods - a long held and meaningful portfolio weight - has received a takeover proposal.   This follows the recent takeover offer for Pacific Brands.  You may recall that Patties Foods is a frozen food business, which owns iconic brands including FourNTwenty and Nanna's.  Its manufacturing operations are based in eastern Victoria (Bairnsdale). 

The offer has been made by Pacific Equity Partners - probably a familiar name to you.  It is the same entity that we co-invested in Energy Developments with, from late 2009 until the DUET offer was finalised.

Summary of the proposal

The price is $1.65 per share, including a 25 cent special dividend.  With the franking on this dividend, the offer is worth $1.757 per share.  The takeover will be progressed through a scheme of arrangement - a formal process involving court approvals and a shareholder vote to proceed (75% of shares, and the majority of shareholders, in favour).  First Samuel clients own just over 4% of the business collectively.   The founding Rijs family (holding ~37% of the company's shares) intends to vote in favour, and the Board is recommending the bid (both subject to the usual caveats of not receiving a higher bid, and an independent expert report conclusion that the bid is in the interests of shareholders).

The offer has progressed quickly from a non-binding, conditional and incomplete proposal early this week, to the Board now recommending it, and entering into a Scheme Implementation Deed.  A shareholder vote will be held in August, and assuming the vote is favourable and court approval is granted (almost a given if the shareholder vote is in favour), it will be implemented in September (i.e. proceeds will be received in September). 

Proposal price vs share price

The proposal price compares favourably to Patties' recent trading price.  This calendar year, until the start of May, the share price traded between $1.05 and $1.20ps.  There was a small rally prior to an article in the AFR last Friday, and the formal announcement from the company on Monday.  At close of trade last Friday, the company's share price was $1.33.

The following graph depicts the share price (no dividends) versus the All Ordinaries index (not accumulation) since our initial investment in Mar-09.

Patties long term share price

Acceptability of the proposal price

Although the proposal price presents favourably vs the share price, First Samuel views Patties as a great, stable, cashflow business, which owns iconic and growing brands.   After several tough years (including the frozen berries incident), it is now positioned to reap the benefits of much hard work to its core operations.  We see many ways in which the business can grow over coming years, not the least the potential for further industry consolidation of its core business.

Therefore, whilst we are not hugely enamoured with the price, with the addition of franking credits we view it as reasonable. 

Our investment history

We initially invested in Patties Foods in Mar-09, when the bulk of shares were acquired. We had followed the company for a while prior to this.  Then, during the depths of the GFC, a fund, we understand, needed to exit their position (we assume to meet redemption requests, certainly not for valuation reasons!) and we were therefore able to acquire our initial position at what we considered to be a highly favourable price.

Top-up investments were made in Jun-09, Mar-10, Nov-13 and Nov-14, taking advantage of the share price at these times.  Additionally, the investment was trimmed in Feb-13. 

The chart below summarises the investment history.  As can be seen, there was a significant return from dividends and the associated franking credits (100% franked) though our ownership.  Interestingly, we have received dividends and franking credits greater than the average share price paid - a great outcome.

Excellent returns from Patties Foods

This results in an average annualised return of 21.3% p.a. over the time we owned Patties Foods, until close of trade yesterday.

Patties great returns 2

*Average purchase cost = net average cost per share (including one sale transaction in Feb-13)

Most satisfying

Patties Foods has been a quintessential First Samuel investment.  It has reinforced that abiding by our investment philosophy will be rewarded.

More specifically:

1.  we invested for a 3 year+ timeframe;

2.  we invested initially because of the strong value proposition offered and we remained invested while value still existed;

3.  we invested in a sound business, with strong management and the ability to grow earnings (which it did);

4.  we added to the investment over time, when we were able to acquire additional shares for a good price.

We are pleased that this takeover offer has been made - it certainly acts to highlight the investment attractiveness that Patties' represents.  As the scheme approval process progresses, we will keep you informed.