Monday's deadline is here for indicative offers for Bob Ingham's poultry processing empire.
Affinity Equity Partners has emerged as the favourite after rival private equity firms KKR and Pacific Equity Partners were said to be losing their appetite for chicken.
The problem for Ingham's adviser, Investec, is that any deal with Affinity is likely to be more complicated than a sale to PEP, KKR, Blackstone or an overseas trade buyer because Affinity would have to sell some of its poultry assets in New Zealand to overcome competition concerns, The Australian Financial Review reports.
Affinity's Tegel Foods, acquired from PEP for $470 million in 2010, controls more than 40 per cent of the NZ chicken meat market; Ingham's NZ is the No.2 player with around 35 per cent.
While the NZ Commerce Commission has been known to take a more pragmatic approach to mergers and acquisitions than its Australian counterpart, it's thought unlikely the NZCC would allow Affinity to control almost 80 per cent of the market. Affinity may have to sell its Ingham NZ assets or a mix of existing and new assets to gain NZCC approval.
Competition concerns are likely to be used as a bargaining chip in negotiations. If Affinity outbids rivals by a big margin, Investec may be willing to look past some of the risks. Alternatively, Affinity may use the need for potential asset sales to play hardball with Investec.
Bob Ingham is believed to be seeking more than seven times earnings for the company, which is said to have better margins and a lower cost base than its peers. Based on forecast EBITDA of $210 million, the business could fetch more than $1.5 billion, making it one of the biggest deals this year.
Investec and Ingham's financier, ANZ, have tried to make it easier for potential buyers to finance a deal by organising a stapled financing package at a multiple of four times senior leverage and 4.25 times on a senior subordinated debt basis.
Management presentations are due to start in the second round. Bidders will no doubt to be keen to establish the strength of Ingham's relationships and contracts with major customers such as Woolworths and the outlook for margins as feed costs soar and retailers cut protein prices to draw shoppers.
The Australian Financial Review