Scandinavian style
Rod Oram on Compac’s new deal
Compac is a quintessential Kiwi company. It identified a big need here, innovated creatively and took the solution boldly out to the world. But its pending sale to a Norwegian competitor shows the weakness of this classic New Zealand business model.
Its story began back in the mid1980s when Hamish Kennedy was sorting kiwifruit by hand on his family’s Kerikeri orchard.
An engineering student, he figured he could revolutionise the process by combining electrical, mechanical and optical technologies.
Today, thanks to many generations of commercially successful technology, Compac is a global leader.
The latest 10-lane. US$1m inspection platform can grade 84 kiwifruit a second, generating 500 images and 30Mb of data on each piece’s external qualities, while another product gathers internal data on storage and taste properties.
In recent years it has grown by some 30 per cent a year, boosted by strong sales and acquisitions to expand its technology and geography. Half its sales are in the US, and half its 700 employees are overseas.
However, its investment in growth and technology made the company barely profitable and hungry for more capital.
In the year ended June, EBITDA was $3m on $152m of sales. It also acknowledges it has a lot of work to do on scaling up production efficiently and profitably.
Its search for capital last year included a look at floating on the NZX. But it concluded local institutions weren’t right for it.
A private equity or corporate investor would bring the longer investment horizon and corporate skills it needs.
It reckons it has found the right new owner in TOMRA, a Norwegian company that began in 1972 making reverse vending machines – you put in an empty drink can and get a bit of cash back.
These days it is a global leader in technologies for sorting materials in recycling processes.
Last year, it reclaimed some 35 billion cans, and the materials it salvaged avoided 25 million tonnes of CO2; it employed 2600 people worldwide, and generated $165m of net profits on sales of $995m in NZ dollar terms.
Since 2004, TOMRA has developed expertise in sorting foods such as nuts, dried fruit and vegetables.
These are belt processes, though, accounting for about 25 per cent of its sales. Compac brings its expertise in sorting and grading fresh fruit in lanes, a complementary technology with higher value and faster market growth.
Mike Riley and Stefan Ranstrand, the CEOs of Compac and TOMRA, see great synergy between their companies.
They will, for example, gain from each other’s technology, suppliers, business processes and market knowledge.
The companies share a vision of their technologies’ contribution to food.
This upside is the main reason why TOMRA is only paying $70 million initially for Compac, with the addition of up to $230m if EBIT reaches a cumulative $84m in the three years to fiscal 2019.
If it is below $20m there will be no additional payment.
In China, for example, Compac is better placed than TOMRA.
Since 2013, it has owned its own plant for making the lower value mechanical parts for its machines sold around the world, while R&D and high tech manufacturing remains here.
This Chinese presence has also helped facilitate its first local sales. The potential for more is great, given China’s vast horticultural output – it is, for example, the world’s largest apple grower by far – and its increasing shortage and cost of rural labour.
In contrast, TOMRA has only 510 machines from its entire range installed in Asia, whereas it has 5350 in the rest of the world.
The companies also share a vision of their technologies’ contribution to food. Downstream, consumers want ever-greater confidence in the quality and safety of it.
Upstream, farmers can use the vast data gathered in the sorting and grading processes to improve their breeding, growing and harvesting practices.
These two powerful trends are driving rapid consolidation of companies in this sector, and increased vertical integration of them.
Compac’s best opportunities lie in a much bigger, better resourced company. Our economy will benefit from TOMRA’s pledge to keep R&D and high tech manufacturing here.
So, the challenge for New Zealand is to figure out how to generate much greater value from the companies we develop and sell.