Pricing the generation clock in a hatchery sale

The desk ran two hatchery sales in the twelve months to June, one in southern Australia and one in southern Chile. In both cases the seller described the business as a supplier of eggs and juveniles with a contracted order book. In both cases the buyer paid for something else. The asset that sets the price of a hatchery is the breeding programme, which is the accumulated selection of a closed population over many generations. Eggs are the product. The population is the business, and it cannot be bought in any other form.

A breeding programme is valued in generations rather than in years of accounts. The southern Australian programme had run for nineteen years and six generations, with a selection index weighted to harvest weight, flesh quality and resistance to one regional pathogen. Each generation had lifted harvest weight at a fixed age by between 6 and 9 per cent. A competitor starting from a commercial population and applying the same selection pressure needs four generations to close half of that gap, and a generation in this species runs to three years. The buyer was paying for twelve years it did not have to spend.

The health record of the site is the second variable, and it is the one that destroys value fastest. A hatchery holds its nucleus population in a single place. One notifiable disease event can require the destruction of that population, and six generations of genetic gain go with it. Our diligence asks where the nucleus is held, where the duplicate is held, how the two are separated in water supply and staff movement, and what the site licence permits if the duplicate has to become the primary. In the Chilean sale the duplicate stood eleven kilometres from the nucleus and shared an intake. We priced that as a threat to the whole programme rather than as an operational finding, and the seller built a second intake before completion.

The order book is the first thing buyers read and the item that moves the price least. Egg supply agreements in this market run for two to four years, priced per thousand eggs, with volume bands and no take-or-pay. They are useful evidence that growers accept the genetics. They are weak security, because a grower can move supplier at the end of a production cycle. Across the two mandates the contracted book supported borrowings of about 2.2 times operating earnings, while the breeding programme supported a purchase multiple more than twice that. The gap between those two numbers is the equity cheque, and it explains why hatcheries clear to trade buyers rather than to lenders.

Two claims are made in every hatchery sale, and neither survives the four tests without documents. The first is a yield claim built from farm records the seller does not own. The second is an expansion claim resting on a site licence that has been applied for and not granted. We underwrite neither. A yield claim enters the model only where the grower records are made available under terms that permit their use, and an expansion enters the model only when the consent is issued and its conditions have been read. On the Australian sale, removing an ungranted expansion took 14 per cent off the seller's indicative range before the first meeting.

Proceeds do not stay in the water. Both sellers were founding families, and both asked the same question after signature, which was where the money should go next. The advantage held by a hatchery is structural and slow to build, which is why it is worth owning. It is also concentrated in one species, one region and one set of licences, which is why the proceeds of a realisation belong somewhere else. Capital earned in aquaculture has funded structured credit and information positions for this firm, and the reallocation is planned before the sale rather than after it.

Published 2022-07-19 by the Investment Banking division. Research is prepared for eligible counterparties and does not constitute advice.