I had the opportunity to speak with Mark Ryan (CEO) and James...

I had the opportunity to speak with Mark Ryan (CEO) and James Fazzino (Chair) yesterday. I wanted to probe a bit further on the Scheme, and what the Board has done to maximise value for shareholders. I won't disclose the details of the conversation here, but I am happy to share a summary of my thoughts.

Is $5.23 fair?
The valuation for Tassal is very much dependent on your expectations of the growth profile and the value of money. I think the salmon business we can all agree is roughly $4 per share based on production values, costs / margin profile, etc. One could argue that there may be a small premium because the licenses in Tasmania are irreplaceable I suppose.

However, the question comes down to how much you value the prawn business, the distribution network (which AFR reported on today), and optionality for new verticals such as Mark's comments about seaweed/asparagospis. It is 100% my belief that the valuation of prawns are underestimated, as seen by the Barrenjoey hack report with a TP of $3.20. Tassal now has 80% of the black tiger prawn market, and is able to scale that up 4x over the next decade with existing land (would require CAPEX for the modular prawn ponds). I believe the current valuation of $5.23 looks at today's contributions to profit without sufficiently valuing the future potential.

Moreover, I think that seaweed and specifically asparagospis will be the next major species for aquaculture production. So far, not a single company has been able to commercialise this. The R&D is already done, and it is now a challenge to make it operational. Tassal has the experience that the likes of Clean Seas or Sea Forests or Tasmanian Oyster Company do not. This is not a $0 valuation considering their trials in the prawn ponds makes them one of the largest seaweed producers already, and there could be further value through carbon credits.

Small note that the dividend of 8-10c unfranked was also missed, so in reality the $5.23 is closer to a $5.15 bid.

I fundamentally do not believe this is a fair price for Tassal. However, I do understand that it may compare with the multiples used in other transactions of salmon businesses, but that is because they do not have the same growth profile of revenue, EBITDA and free cash flow that Tassal has.

Is $5.23 enough?
While I think $5.23 is not fair, it's likely that it is enough to get the deal done. Seeing Argo sell out their position - one of the larger and long-term shareholders - is pretty indicative of what other fund managers will do. Most of the shareholders have held for shortish periods of time, and will take the profits and move on to other areas. The hope that $5.50 would be the transaction price has faded for me. If there were any other bidders waiting on the sidelines, I think they would have showed their hands by now.

In the end, I believe Cooke and Williams have done a very very very good job at getting the best price for themselves, but of course that means shareholders miss out. They outplayed Tassal and Goldman Sachs imho.

What's next?
It is my opinion that the best alternative to a negotiated deal with Cooke is No Deal. But I am also realistic that I think 75% of shareholders will vote in favour of Cooke's scheme. I suspect that Grant Thornton or Graeme Samuel or whomever will write an excellent independent report showing that $5.23 is precisely within the bounds of fair value of the business, and in November the transaction will be complete.

Now the question is whether one holds on to their shares in the hope of something changing, or sell out in the meantime and redeploy the capital elsewhere. Good luck.