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Up to $300M in earn-outs available to Compac vendors, assuming turnaround

Tuesday 28th February 2017

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The New Zealand founders and former shareholders of the Compac fruit sorting company are in line for up to $230 million in earn-out payments on top of the $70 million paid for the company by the Norwegian food, recycling and mining sorting business Tomra.

The detail of the deal, announced last October, emerges in the Overseas Investment Office's notification of foreign investments approved in January and in a presentation to shareholders published by Tomra with its fourth-quarter results last week.

Tomra executives disclose that they had bought Compac in a distressed state, making losses caused by a lack of cash flow owing to over-extension in some parts of its fast-growing business, in spite of $152 million of revenue in the most recent financial year, ended June 30.

"The financial history shows a company that has been in distress, short of cash flow because of loss-making activities in some areas," Tomra president and chief executive Stefan Ranstrand told analysts last Thursday in a video briefing published on the Tomra website.

Presentation slides say Compac disposed of businesses in Spain on Feb. 1 and is "refocusing its operations in Latin America to be sales and services, and not manufacturing".

This was expected to cut revenue by around $25 million in annual revenue.

The New Zealand vendors were planning to continue operating distribution businesses in Spain and Italy, said Ranstrand. The OIO documents list Hamish and Kim Kennedy and Brian Leaning as owning 75.03 percent of Compac prior to the sale. Hamish Kennedy founded the company in 1984. Other New Zealand shareholders owned the remainder of the business, which developed technology ideal for sorting fruit such as apples, kiwifruit, and stone and citrus fruits.

Tomra chief financial officer Espen Gunderson told the briefing the $230 million in potential earn-outs would be based on financial performance through to the end of Tomra's financial year in August 2019, capped at accumulated earnings before interest and tax of $84 million over the three-year period. 

Financial information published in the presentation shows Compac lost $1 million and $2 million in the 2016 and 2015 financial years respectively on an earnings before tax and interest basis, and recorded a $5 million ebit loss in the half-year to Dec. 31. 

At a multiple of 10 times ebit, Gunderson said the price paid for Compac was "fair" and that "if we manage to improve, we will share that with the vendors".

"If it happens fast, they will get a significant part of this," he said. "But speed remains to be seen here."

Ranstrand described Compac's fresh fruit sorting equipment as world-leading, with a strong position in the US market. The New Zealand-developed equipment digitally examined the inside and outside of fresh produce to allow very accurate grading and customer satisfaction. Coupled with Tomra's technology for weeding out debris that accompanied freshly harvested produce, the company expected to be able to offer global food businesses a "one-stop-shop" product for sorting fresh produce.

Tomra had around 25 percent of the global market for sorting produce, although its dominance to date has been in processed rather than fresh produce, he said.

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