Bloomberg News

GrainCorp Offers Top Asia Return as Deal Seen Closing: Real M&A

November 26, 2013

GrainCorp Warehouse

The GrainCorp Ltd. logo is displayed outside a warehouse used for holding grain for export, at the Port of Portland, in Portland, Australia. Photographer: Carla Gottgens/Bloomberg

Traders in GrainCorp Ltd. (GNC) stand to pocket the biggest return on any major takeover in Asia by wagering that the Australian government will approve Archer-Daniels-Midland Co. (ADM:US)’s $2 billion acquisition.

Amid opposition to the deal from some lawmakers, eastern Australia’s largest grain handler is trading 8.4 percent below Decatur, Illinois-based ADM’s offer, the biggest discount among similar-sized acquisitions pending in Asia, according to data compiled by Bloomberg. After pledges by the newly elected government that Australia is “open for business,” Treasurer Joe Hockey is likely to allow the sale, said Morningstar Inc. (MORN:US)

“The current discount makes it an attractive buying opportunity,” Dennis Hulme, an analyst at BBY Ltd. in Sydney, said in a phone interview. “It’s unlikely to be blocked.”

A U.S. purchase of Australian assets has never been barred under a 1975 law governing investment from overseas, said law firm King & Wood Mallesons. Arguments that the sale of Sydney-based GrainCorp is against the national interest make no sense, partly because ADM plans to spend more on local infrastructure, said Commonwealth Bank of Australia. (CBA) There’s only a 10 percent chance the deal will be blocked, the bank said.

GrainCorp had fallen 9.4 percent this month as of yesterday, including a 4 percent drop on Nov. 15, after the West Australian newspaper, citing lawmakers it didn’t identify, said Prime Minister Tony Abbott was inclined to veto ADM’s offer or impose conditions that would make it unviable. He said later that day the decision was a matter for the treasurer. Hockey is due to rule on ADM’s bid by Dec. 17 after recommendations from the Foreign Investment Review Board.

ADM Offer

Shares in the company rose 5 percent as of 1:01 p.m. in Sydney today, after ADM said it will spend an additional A$200 million on agricultural infrastructure and cap grain handling charges at silos and ports.

GrainCorp, which controls seven of eight terminals that ship grain in bulk from Australia’s east coast, closed yesterday at A$11.18. That’s below ADM’s offer price of A$12.20 for each GrainCorp share it didn’t already own. The bid values ADM’s largest-ever takeover at A$2.23 billion ($2 billion), excluding GrainCorp’s net debt.

Among takeovers in Asia larger than $1 billion, no stock trades further below a bid, according to data compiled by Bloomberg.

“The chances of it being approved are considerably better than that,” John Maysles, a Los Angeles-based analyst at Elevation LLC, said in a phone interview. “A lot of this opposition was to be expected.”

Australia’s control of its food security is at risk, Deputy Prime Minister Warren Truss said this month. Truss leads the Nationals, a party that draws support from rural voters and is part of a coalition elected in September.

Emotional Issue

Mining magnate and first-time lawmaker Clive Palmer said he plans to introduce a bill Dec. 9 opposing the deal. This month, he called GrainCorp “a great national institution” that shouldn’t be sold. A Senate committee inquiry into the nation’s grain-handling industry is due to report Dec. 11. Its interim report in August said ADM’s takeover could hurt competition.

“Everyone does get excited about foreign ownership,” Peter Rae, a Melbourne-based analyst at Morningstar, said in a phone interview. “It is an emotional thing. On the balance of probability, it probably will go through.”

Angus Trigg, a spokesman for GrainCorp in Sydney, declined to comment on the likelihood of the deal’s completion. Jackie Anderson, a spokeswoman for ADM, the world’s largest corn processor, said in an e-mail that the takeover “would create significant value for grain growers, GrainCorp shareholders and the Australian economy.”

Transaction Timing

When asked at a Morgan Stanley conference this month about when the deal may be completed, ADM Chief Executive Officer Patricia Woertz declined to comment, citing the “sort of sensitive period” leading up to Hockey’s ruling. Chief Operating Officer Juan R. Luciano said on an Oct. 29 earnings call that he expected the transaction to close in the first quarter of 2014.

After his election on Sept. 7, Abbott declared Australia “once more open for business.” In parliament last week, he said the nation has “long supported foreign investment.”

Hockey will probably approve the deal with conditions that ease farmers’ concerns that a takeover will limit competition, said Hulme, the analyst at BBY.

Growers are concerned ADM will restrict access to ports or raise storage fees, according to the Victorian Farmers Federation.

No Merit?

“Farmers should be happy to see that someone sees value in providing them services,” Michael Swanson, a Bloomington, Minnesota-based agricultural economist for Wells Fargo & Co., the largest U.S. farm lender, said in an e-mail. “Australia needs to export its excess grain given its limited domestic demand growth.”

Australia’s competition regulator has said it doesn’t plan to oppose the deal. ADM said in a submission to the Australian Senate in June that its proposed purchase of GrainCorp wouldn’t hinder the access grain growers have to ports and facilities, and that it would increase their access to world markets. ADM also pledged investments to maintain and improve infrastructure.

“We cannot see merit in the arguments against the ADM transaction,” Jordan Rogers, an analyst in Sydney at Commonwealth Bank, said in a phone interview.

The potential profit Australian farmers stand to make by gaining access to bigger markets in China and the rest of Asia from ADM’s global reach may be lost in the political debate over foreign ownership and concentration of power, said Nathan Kauffman, the Omaha Branch executive with the Federal Reserve Bank of Kansas City who tracks agricultural and rural economies.

Still Opposed

GrainCorp’s largest individual shareholder still opposes the deal, and ADM needs approval from holders of more than 50.1 percent of GrainCorp shares to proceed with the bid. The offer is open until Feb. 28.

The company needs “strategic foreign investment,” not a controlling overseas shareholder, Don Seaton, who owns a 2.2 percent stake, wrote in the Australian newspaper Nov. 18. Seaton, who sold his stake in oils processor Gardner Smith Group last year to GrainCorp in return for equity, said Australia should own what’s left of its agricultural infrastructure.

China Approval

All the same, ADM has said the deal has been cleared by the European Commission and government trade or competition bodies in the U.S., South Korea, Japan, Canada and South Africa. It still needs approval from China’s Ministry of Commerce.

The U.S. has contributed the most foreign investment into Australia every year since 2002, according to annual reports published by the Foreign Investment Review Board.

The board assesses proposed takeovers on a case-by-case basis, said Malcolm Brennan, special counsel for King & Wood Mallesons who advises clients on Australia’s foreign investment policy. Brennan said he isn’t involved in ADM’s offer for GrainCorp.

“I view the risk of it being blocked as being relatively low,” Hulme at BBY said. “Anything can happen in politics but it doesn’t make sense to me to block the sale.”

To contact the reporters on this story: Angus Whitley in Sydney at awhitley1@bloomberg.net; Shruti Date Singh in Chicago at ssingh28@bloomberg.net

To contact the editors responsible for this story: Sarah Rabil at srabil@bloomberg.net; Simon Casey at scasey4@bloomberg.net


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Companies Mentioned

  • ADM
    (Archer-Daniels-Midland Co)
    • $48.07 USD
    • -0.05
    • -0.1%
  • MORN
    (Morningstar Inc)
    • $66.53 USD
    • 0.04
    • 0.06%
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