One of Covid-19’s biggest casualties in the agrifoodtech dealmaking arena so far is Livestock Improvement Corporation’s (LIC) scuppered $70 million investment in Afimilk.
The New Zealand dairy farmers’ cooperative had done everything but sign on the dotted line for a 50% stake in the Israeli milk meter maker. LIC’s senior management had made the case for buying into Afimilk to its shareholders: the investment would give the co-op access to valuable data to improve dairy outputs – as well as data on other farming methods beyond pastoral husbandry, offering it a chance to diversify – while also giving it a wider global footprint.
The executive team believed they’d done enough to convince their shareholders that the deal was right for the coop’s future, LIC’s CEO Wayne McNee tells AFN. But LIC’s shareholders – consisting almost entirely of Kiwi dairy farmers – voted down the acquisition early last month, mothballing the deal.
“We spent almost two years doing due diligence on Afimilk,” McNee says. This included regular meetings with management and shareholders, as well as multiple trips over to Israel to meet Afikem and its existing shareholders, kibbutz Afikem and private equity firm Fortissimo.
“We thought there was a good strategic fit, and – with them being a kibbutz and us being farmer-owned cooperative – a fairly good cultural fit, too,” he says. “We spent a lot of money – for a coop – [and] put a lot of effort in, and a very good proposal. But as the [shareholder] vote proceeded, the impacts of Covid began to affect the market.”
LIC’s management went back to its shareholders in the midst of the vote to explain how the pandemic and the ensuing economic turmoil had altered the proposed deal beyond their control. Due to fluctuations in the value of the New Zealand dollar, the purchase price for Afimilk went NZ$20 million higher than initially indicated.
“The other, probably more important thing was the uncertainty around the market for the Afimilk product and the combined company. We just advised the shareholders Covid was creating uncertainty and that we all needed to take that into account,” McNee says. “But the strategic underpinnings wouldn’t’ve changed. That said, we understand as a board why the shareholders voted the way they did.”
Dairy at heart
Though the Afimilk acquisition has been put back in the bottle, that doesn’t mean LIC is out of the market for tech-driven deals.
Speaking just after the shareholder vote, LIC chairman Murray King told AFN that the company would continue to consider “strategic opportunities,” including investments “in companies that are consistent with [LIC’s] strategy.”
In fact, LIC has made a number of tech-based investments in the past. In February 2014, it completed the acquisition of fellow Kiwi outfit Dairy Automation Limited, significantly expanding its milking insights offerings. In February 2016, it ventured across the Tasman Sea to buy a 75% stake in Australia’s Beacon, a builder of heat detection technology for determining when cows are in estrous.
As these earlier investments and the scrapped Afimilk purchase indicate, dairy will remain at the heart of what LIC does on the dealmaking front. The farmer coop is perhaps still best known for what it started out doing in New Zealand’s fertile Waikato region over a century ago: dairy bull genetics, including breeding programs, herd testing, and artificial insemination.
But as time went by, LIC moved into farmyard automation – providing its dairy farmers with tech such as testing sensors that can measure the fat and protein content of freshly expressed milk, or AI-powered drafting gates and heat detectors for assessing cattle health.
Starting in 2016, the coop embarked on a strategic review. In addition to simplifying its share structure, LIC split into two units that would remain under a single umbrella: its core herd improvement business, and its agritech business, including automation and farm data.
“The board did a roadshow for shareholders, to understand what was most important [to them] in the business, and what was useful but less core,” McNee explains. “The view from most shareholders was that bits of the business like artificial insemination, breeding, and herd testing are core, and should remain 100% owned by the coop. But diagnostics and aspects of the software – but not ownership of data – they were comfortable with us forming a vehicle [for] to raise outside capital, should we need to.”
This resulted in the splitting off of the Agritech business to explore partnerships and investments while supporting the core Herd Improvement business.
“The thinking was that we could use that to raise capital or form strategic partnerships and invest in other types of businesses, provided we left that core business with the farmers,” McNee says.
For the time being, the agritech unit is completely internally funded with cash and debt facilities — LIC finished the last financial year in July 2019 with net cash and no debt.
Another part of LIC’s strategic reset has been the adoption of an innovation-led growth mindset, to tap into tech that can help the company shore up its position and diversify. This is driving the agritech unit’s approach to dealmaking.
“We can broaden by serving farmers, or take our tech offshore, or invest offshore – and all of those things are on the table for us,” McNee says. “That’s actually been our strategy since before the last refresh – I guess we’ve just got more focused. For example, we have an M&A team which we’ve bolstered over the past few years so that we can do [deal] analysis ourselves.”
In terms of acquisition and investment targets, or potential strategic partners, LIC is generally looking for companies that align with its strategic objective of supporting its core dairy genetics business.
In addition to milk monitoring technologies, that means access to phenotypic data to help inform breeding programs, as well as data on things like methane reduction and animal health and welfare.
“About 90% of our focus is enhancing the core and looking at investments that do that. A lot of our investment [in this regard] is on IT, and expanding our product range for farmers,” McNee says. “But about 10% can be beyond that. We’ll invest in anything from a startup to an established business.”
Beyond the core
LIC’s ‘Strategy Refresh’ report from 2018 lists some of the areas that these ‘beyond the core’ investments might explore, such as non-dairy genetics, for beef or other livestock; crop growth and productivity; and food traceability systems.
The co-op’s preference for its investment targets is that they have established a business of their own to some extent. “We are a strategic investor, not a financial investor. We prefer them to have something developed into a product that our shareholders can use,” McNee says. Though LIC wants a financial return on investment, “if it can add value for our shareholders’ businesses and we can bring it back to New Zealand, that’s a bonus.”