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ADM’s GrainCorp Takeover Seen Needing 18% Boost: Real M&A

November 05, 2012

GrainCorp’s Takeover by ADM S

Australia was the world’s largest wheat exporter after the U.S. last season. Photographer: Carla Gottgens/Bloomberg

Traders are convinced GrainCorp Ltd. (GNC) is so alluring to Archer-Daniels-Midland Co. that eastern Australia’s largest grain exporter will win the biggest takeover offer increase in developed Asia.

With investors who profit from acquisitions expecting ADM to raise its A$2.68 billion ($2.8 billion) offer or risk losing to a rival bidder, GrainCorp’s stock ended last week 4.3 percent higher than the proposal of A$11.75 a share. That’s further above the offer price than any pending takeover in the developed Asia Pacific region valued at more than $100 million, according to data compiled by Bloomberg. Deutsche Bank AG said other agricultural deals imply GrainCorp should fetch A$13.90 a share, 13 percent greater than last week’s price and 18 percent more than the current bid.

The scrutiny Australian regulators will give any foreign buyer will also motivate Decatur, Illinois-based ADM (ADM:US) to raise its bid to help reach an agreement with GrainCorp’s board, said Churchill Capital Ltd. Sydney-based GrainCorp, which operates seven of the eight ports from which grain is shipped in bulk from Australia’s east coast, is the last publicly traded wheat merchant of its scale in Australia and could attract other bidders, JPMorgan Chase & Co. said.

“If you want to be a player in one of the largest wheat export markets globally, then this is a must-have asset,” Rhett Kessler, who helps manage about A$1.3 billion at Pengana Capital Ltd. in Sydney, said in a phone interview. “If ADM don’t buy these assets now, they may not get another chance. The first bid is never the final price, and there are many other participants in this market that would have interest in this asset.”

Australian Farmers

GrainCorp, due to publish its full-year earnings report on Nov. 15, has yet to respond to ADM’s offer and has appointed financial and legal advisers. Angus Trigg, a GrainCorp spokesman, declined to comment. Jackie Anderson, an ADM spokeswoman, also wouldn’t comment on the company’s proposed bid price for GrainCorp.

ADM, the world’s largest corn processor, said Oct. 19 that it boosted its GrainCorp stake to 14.9 percent from 4.9 percent and wants to buy the rest of the company. Three days later, GrainCorp said it received the A$11.75-a-share cash offer, which values the business at A$2.68 billion excluding debt.

In addition to its infrastructure, which includes 21 million metric tons of storage capacity at more than 280 inland grain-handling sites, GrainCorp would give ADM annual production of more than 1 million tons of malt.

Rising Population

“With GrainCorp you have a large terminal network that can move grain from local farmers to export markets through its own ports,” said Tom Leske, a sales trader at Churchill Capital in Singapore and a former employee of the Australian company. “This gives it ready access to Asian and east African markets, which is where the key growth is.”

Australia was the world’s largest wheat exporter after the U.S. last season, according to the U.S. Department of Agriculture. The nation shipped 24.5 million tons of wheat in the year through September, the Australian Bureau of Agricultural and Resource Economics and Sciences estimates.

After the nation’s wheat production and exports climbed to all-time highs, analysts estimate that GrainCorp’s net income for the year that ended in September rose to a record A$216 million, according to data compiled by Bloomberg. With the government forecasting a 24 percent drop in wheat production for the crop currently being harvested, earnings are projected to fall to A$171 million in fiscal 2013, according to the average analyst estimate.

Food Demand

Still, rising populations and incomes are boosting demand for food commodities in Asia and emerging markets. World food production will need to expand 70 percent by 2050 as the global population swells by 2 billion, according to the United Nations. Countries will spend more than $1 trillion on food imports for a third year in 2012, the UN estimates.

That outlook has driven several other large agricultural acquisitions, including Glencore International Plc’s agreement in March to buy Canada’s Viterra Inc. for C$6.1 billion ($6.1 billion), excluding debt. In May, Marubeni Corp. said it would purchase Gavilon Group LLC for $3.6 billion, excluding debt.

GrainCorp agreed in August to spend about A$472 million on Gardner Smith Group, Australia’s second-largest oilseed crusher, and Integro Foods, Australia and New Zealand’s largest refiner of edible fats and oils.

GrainCorp has traded above ADM’s A$11.75 offer since the day it was announced last month amid expectations that other bidders would emerge, either winning control of the company with a higher offer or forcing ADM to pay more. At A$12.25, the shares ended last week 4.3 percent above the offer. That’s a larger gap than on any other takeover in developed nations in the Asia-Pacific region valued at more than $100 million, according to data compiled by Bloomberg.

The shares slipped to A$12.21 in Sydney trading today.

Rival Bidders

“Given the nature of GNC’s assets in a rapidly consolidating global market, as well as it being the last available play in the Australian grains market of any real significance, we believe there are a number of companies that would potentially be interested,” JPMorgan analyst Stuart Jackson wrote in an Oct. 19 research note, referring to GrainCorp by its stock ticker.

Potential buyers range from White Plains, New York-based Bunge Ltd. (BG:US) to Hong Kong’s Noble Group Ltd. (NOBL), Jackson wrote.

Susan Burns, a Bunge spokeswoman, declined to comment on any interest the company may have in GrainCorp. Stephen Brown, a Hong Kong-based spokesman for Noble, said the company doesn’t comment on speculation. Noble has said it plans to expand its agricultural unit.

Summa Group, Russia’s biggest port operator, considered a bid for GrainCorp before ADM made its offer, two people with knowledge of the matter said last week.

Fair Price

ADM’s current bid values GrainCorp at 8 times forecast fiscal 2013 earnings before interest, taxes, depreciation and amortization of A$400 million, according to Mark Wilson, a Sydney-based analyst at Deutsche Bank. That compares with an average of 9.2 times Ebitda paid in 15 Australian grain acquisitions since 2000, including Agrium Inc.’s purchase of AWB Ltd. and Viterra’s acquisition of ABB Grain Ltd., he wrote in an Oct. 19 research note.

At the higher multiple, GrainCorp would fetch A$13.90, or A$3.2 billion excluding debt, Wilson wrote.

“The current offer price of A$11.75 is not high enough,” Lee Mitchell, Singapore-based special situations trader at Religare Capital Markets Ltd., said by e-mail. “ADM will have to increase the offer price to a minimum A$13 per share, with A$14.10 per share being our fair value and more in line with recent transactions.”

Financing Restrictions

ADM’s finances may restrict how high its bid can go. Standard & Poor’s Ratings Services said on Oct. 20 that it may downgrade ADM’s credit ratings because of uncertainty about how it will fund the deal. With cash of $1.3 billion, the company had net debt of $8.6 billion (ADM:US) at the end of June, data compiled by Bloomberg show.

“The big traders operate on a very slim margin,” Dennis Hulme, an analyst at BBY Ltd., said in a phone interview from Sydney. “I expect them to be very price conscious. They’d like to have the assets, but they don’t want to overpay.”

Still, ADM will be motivated to reach an agreement with GrainCorp’s board to ease approval by Australia’s Foreign Investment Review Board, Churchill Capital’s Leske said. FIRB makes a recommendation to the country’s treasurer, who can block a deal.

‘Smoother Ride’

“It’s great if you have a friendly reception from the target,” Malcolm Brennan, special counsel at law firm King & Wood Mallesons, said by phone from Canberra. “That support says they think it’s a good idea and will look after employees and local operations, the key factors when looking at the national interest test. You are going to have a smoother ride.”

Australia’s Treasury didn’t immediately reply to a written request for comment sent to its media office.

ADM’s increase of its stake in GrainCorp last month is a sign that it’s committed to winning control, Religare’s Mitchell said.

“There’s always the expectation that when you put in an initial offer, there’s a bit up your sleeves,” said Paul Jensz, a Melbourne-based analyst at Octa Phillip Financial Group Ltd. “They’ve said it’s a strategic imperative to be in this region, buying grain from what they believe is a high-grain-quality region.”

To contact the reporters on this story: Soraya Permatasari in Melbourne at; Brett Foley in Melbourne at; Phoebe Sedgman in Melbourne at

To contact the editors responsible for this story: James Poole at; Jason Rogers at; Sarah Rabil at; Philip Lagerkranser at

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