By Brandt Brereton and Jared Hanley
Brereton, Hanley & Company
The western U.S. produce industry appears to be experiencing an accelerating rate of mergers and acquisitions. Brandt Brereton and Jared Hanley are experts on this topic, having spent the last 22 years advising owners of agricultural assets on various types of corporate finance transactions. Recently WG&S discussed with them the influences and trends that they are observing.
WG&S: The fresh produce arena is seeing a lot more merger and acquisition activity today than it did just a decade ago. What’s driving this change?
Brereton: There certainly is an increasing rate of activity, and there are a number of causes. First, very broadly, there are demographic issues. The wave of Baby Boomer retirements is accelerating, with many younger generations not interested in taking over operations. This is not unique to the ag industry, but given the traditional family ownership structures in agriculture, it is particularly disruptive. Second, massive consolidations among retailers are forcing growers to follow suit and similarly consolidate in an effort to hold pricing power. Third, Wall Street has made great efforts to edge its way into what has traditionally been closely held, private businesses. This is true for both operating farms and farmland. Many very active public company and private equity buyers are backed by cheap institutional money. Finally, for social, operational, and financial reasons, more and more agricultural companies are exploring internal succession plans, like Employee Stock Ownership Plans, commonly referred to as “ESOPS.” Those ESOPs perpetuate the independence of the business, while providing shareholder liquidity and retaining control.
WG&S: Can you explain what an ESOP is?
Hanley: An Employee Stock Ownership Plan is a special form of retirement plan that provides employees with beneficial (though not outright) stock ownership in their employer’s firm at no expense to the employees. On behalf of its employees, the employer contributes to the ESOP stock or cash, which is held by the ESOP for the exclusive benefit of the employees. The employer receives a tax deduction in the amount of the cash or stock it contributes to the ESOP. If the stock is acquired by the ESOP from existing shareholders, then the sellers of that stock receive fair market value for their shares as well as the opportunity to eliminate taxes on the sale proceeds. The stock held for each employee is redeemed from the employee’s retirement account upon his termination of employment or retirement.
So, basically, an ESOP is a way to transfer ownership from the current owners to the employees that doesn’t cost the employees anything, provides an ongoing tax shield for the company’s operations, and allows the current owner to avoid paying any taxes on the sale. An ESOP also allows a company with a strong culture and management team to not disrupt operations but achieve tax-advantaged liquidity for selling shareholders. It is important to note that the employees have “beneficial” ownership, not actual ownership of the shares or voting controls.
WG&S: Can you provide a few examples of ESOP transactions?
Hanley: Sure, but bear in mind that ESOPs can be involved in many types of transactions. For example, they can be used as a platform for an acquisition strategy, or an ESOP-owned company can be sold like any other company. Robert Mann Packing was a successful ESOP-owned company that was recently sold to a strategic buyer. In terms of implementing an ESOP for succession planning or internal operations, the recent Tanimura & Antle transaction is a great example. The company wanted to empower its employees and took its role in the greater community very seriously. After considering many options, T&A believed an ESOP was the best way to achieve that.
WG&S: What future trends do you anticipate in terms of activity and valuations?
Brereton: As I mentioned, the wave of Baby Boomer retirements is just hitting its stride, so that supply impact will continue for the next decade or two. The attractive value proposition many farming enterprises can provide will also continue to attract the attention of Wall Street. So, in general, I don’t see any reason that activity would slow down. Turning to valuations, given the maturity of the produce industry and inherent stability of food consumption, some of the main drivers of value are external ones: namely, the health of the debt and public equity markets. We are currently in a robust debt environment, which allows buyers to cheaply leverage their acquisitions and pay top dollar. On average, the multiple of earnings paid today are some of the highest we have seen in a decade. Despite this, it’s difficult for strategic buyers and private equity groups to pay sellers, in after-tax dollars, more than what they can pay themselves by “selling in” to the ESOP. Hence, many multi-generation farming companies are turning their attention to learning about this type of transaction.