TPB Acquisition Corp I (NASDAQ:TPBA) has entered into a definitive agreement to combine with agritech business Lavoro, at an enterprise value of $1.22 billion, or 7.1x its 2022E EBITDA.

Sao Paulo, Brazil-based Lavoro is a diversified omnichannel seller of agricultural inputs in Brazil and the Latin American region more broadly.

The combined company is expected to trade on the Nasdaq under the symbol “LVRO” once the deal is completed in the fourth quarter of 2022.

Transaction Overview

TPB is funding the deal with $180 million from its current trust and the parent of its sponsor, The Production Board, has agreed to invest a $100 million PIPE priced at $10 per share into the deal. This is noteworthy in and of itself considering that PIPEs have become a rarer feature in SPAC deals due to the risk-off environment.

Only one of August’s 17 announced deals included a PIPE at all, while the nine deals in June and 11 in July featured three PIPEs each. Full-price pipes have become even less common. Of the 113 SPACs with announced deals currently pending close, only 34 include PIPEs priced at or above $10 per share.

Lavoro expects to add $225 million to its balance sheet through the deal while footing $25 million in transaction fees and paying out $30 million to its owner Pátria Investimentos Fund. Should the deal’s net proceeds exceed $250 million at close, however, a larger portion of the proceeds will be used to cash out Pátria. TPB must maintain at least $180 million in cash available in order for the deal to close.

Assuming no redemptions, Pátria is expected to own 74% of the combined entity with public TPB shareholders taking 15%. The Production Board is expected hold about 9% through its PIPE and the employee stock ownership plan (ESOP) will hold a pool of about 2% of shares.

Two-thirds of TPB’s promote shares are to vest in equal tranches only after the combined company trades at or above $12.50, then $15 within three years of close. The remaining one-third are to vest at the deal’s close but will be subject to a lock-up.

Half of these promote shares are to be locked for one year, with another quarter locked for 18 months and the last quarter released only two years after close.

Company-held shares are to be released according to a similar schedule. One-quarter will be released 180 days from close, one quarter at the one-year mark, then one quarter each at 18 months and 2 years out from close.

TPB CEO and founder David Friedberg is expected to join Lavoro’s Board following the deal’s completion.

Quick Takes: It makes sense that Lavoro has drawn interest from The Production Company, which is backed by agritech giant Montsanto, because it is in many ways a miniature Monsanto based in Brazil.

Founded in 2017 and formed from the assembly of more than 20 large and small companies brought together by M&A, Lavoro has established a firm foothold in Latin America. This is likely to be the region of the future in terms of agricultural growth as it already exports more goods than the United States and has been growing at a much faster pace than the US market since 1995.

Despite this growth, Latin American markets still hold significant headroom for companies working to optimize this agricultural activity. Brazil accounts for roughly half of Latin America’s total agricultural exports, but Brazilian corn farms average just half of the yield per hectare as those in the US, for instance.

The market for crop inputs like fertilizers and optimized seeds have grown at a CAGR of 20% and 14% since 2017 in Brazil, versus 2% and 1%, respectively, in the United States.

For its part, Lavoro has become the top agricultural inputs retailer in Brazil with 878 sales reps selling to about 53,000 farmers through 193 stores. It is omnichannel, however, with about 6,700 different products available for purchase online and farmers in the region remain split which channels they prefer. In addition to its base in Brazil, it is currently active in Colombia and Uruguay and expects to have a presence in Peru, Paraguay and Chile by 2024.

Much of its product mix comes from major suppliers, but it has also gained a line of proprietary products through both internal development and M&A. These have focused on higher-margin specialty fertilizers and biologic crop treatments that allow for crop protection via low-carbon, ESG-friendly means.

The company expects to generate $117 million in EBITDA this calendar year from $1.77 billion in revenue coming from the core business, but acquisitions already closed on are expected to add $23 million more in EBITDA and $247 million in revenue this year.

The further acquisition targets it has already identified are expected to themselves generate $32 million EBITDA and $241 million in revenue this year. Once all have been integrated, Lavoro expects it will be able to generate $279 million in EBITDA in 2023E from $3.1 billion in revenue.

All of this makes Lavoro the most profitable target SPACland has seen in some time, at a time when the market is highly concentrated on cash generation.

The valuation is certainly fair to the sellers as well, however. Priced at 7.1x its 2022E EBITDA, it comes at a premium to peer Brazilian agricultural companies, which trade at an average of 6.3x. But, Lavoro is diversified beyond retail sales in the country and is also diversified within its product portfolio beyond the agricultural products that trade somewhat cooler.

Specialized fertilizer makers trade at an average 2022E EBITDA multiple of 3.7x, while agricultural processors and inputs providers – including Lavoro suppliers like Bayer (DE:BAYN) – trade at average multiples of 8.7x and 11.3x, respectively.

However, Nutrien ag, which Lavoro flags as its closest competitor, trades at 8.7x 2022E EBITDA and 9.1x 2023E EBITDA, showing Lavoro priced at a significant discount.

ADVISORS

• Barclays Capital Inc. is serving as capital markets advisor to TPB Acquisition Corp.
• Cooley LLP is acting as legal advisor to TPB Acquisition Corp.,
• Davis Polk & Wardwell LLP is acting as legal advisor to Lavoro
• White & Case LLP is acting as legal counsel to Barclays.