AUSTRALIA'S most valuable listed agribusiness, GrainCorp, could fall into foreign hands after US company Archer Daniels Midland snapped up a reported 10 per cent stake at a 33 per cent premium.
GrainCorp, which has a market capitalisation of $2 billion, suspended trade in its shares yesterday confirming ADM wanted to "engage in discussions . . . concerning a potential transaction".
GrainCorp told the exchange it had received "no formal proposal" but if it did, it would be reviewed by the board along with "other options to maximise value" for shareholders.
ADM's stake, apparently bought in two block trades brokered by Citi for $268 million at $11.75 a share, falls below the 15 per cent threshold that would require Foreign Investment Review Board approval.
Australia's agribusinesses sector has succumbed to a wave of foreign buyouts, including that of ABB Grain in 2009, and AWB Ltd in 2010.
According to the Rural Industries Research and Development Corporation, foreign investors now own half the country's 23 licensed wheat exporters (counting both Viterra, now subject of a takeover by Glencore, and Cargill); half the country's milk production (via Fonterra, Lion, Parmalat); 60 per cent of raw sugar production (via Finasucre, Wilmar, COFCO); and 40 per cent of Australian red meat production (via JBS, Cargill and Nippon Meat Packers).
RBS Morgans agribusiness analyst Belinda Moore said GrainCorp, which handled as much as 60 per cent of eastern Australia's grain crop, was "the last man standing" in the sector and was now in play.
"We always believed that GrainCorp would be taken over at some point, given the strategic nature of its assets," Ms Moore said.
"However, corporate activity in the stock has come sooner than expected.
"Given the scale and strategic nature of Graincorp's assets and the fact that it is the last remaining significant grain company capable of being taken over in Australia, we expect a number of parties could be interested and a bidding war may emerge."
Investors are expected to bid up GrainCorp shares when the trading halt rolls off. Ms Moore said agribusiness takeovers were priced on average at nine times earnings. Applying this multiple to RBS's average season forecast for 2013-14 resulted in a takeover price of $12.12 for GrainCorp.
ADM, which has crop sourcing, transportation, storage and processing assets in 75 countries and is valued at $US18 billion, owns 16 per cent of Singapore palm oil giant Wilmar International. Wilmar is already a major investor in Australia's agricultural industries, having acquired the old CSR sugar business Sucrogen and 10 per cent of Goodman Fielder.
At the end of August, GrainCorp paid $472 million to create a new oils business, acquiring the private Gardner Smith Group and Goodman Fielder's Integro oils division. That transaction included a $159 million capital raising at $8.80 a share.
Goldman Sachs analysts, tipping a "kick" in mergers and acquisitions, said a GrainCorp takeover would give ADM a key foothold in Australia, the world's second-largest wheat exporter.
Global food prices are surging, partly due to drought and crop failures in the US, South America and Russia.
Rabobank analysts predict world food prices will reach an all-time high in the first quarter of 2013 and, particularly for grains and oilseeds, stay high for at least the next 12 months.
Frequently Asked Questions about this Article…
What did Archer Daniels Midland (ADM) do with GrainCorp shares and why does it matter for investors?
According to reports, US agribusiness Archer Daniels Midland (ADM) bought a roughly 10% stake in GrainCorp via two block trades for about $268 million, paying $11.75 a share (a ~33% premium). GrainCorp suspended trading and said ADM wants to "engage in discussions" about a potential transaction. For investors this signals takeover interest in one of Australia’s largest agribusinesses and can lead to heightened share price volatility and takeover speculation.
Does ADM’s reported stake in GrainCorp need Foreign Investment Review Board (FIRB) approval?
No. The article notes ADM’s reported stake falls below the 15% threshold that would require FIRB approval, so the reported 10% position would not automatically trigger a formal FIRB review.
How might a takeover bid affect GrainCorp’s share price and what takeover price have analysts mentioned?
Analysts expect investors to bid up GrainCorp shares once the trading halt lifts. RBS Morgans says agribusiness takeovers are typically priced at about nine times earnings; applying that multiple to their 2013–14 forecast implied a takeover price near $12.12 a share. ADM’s reported $11.75 purchase already reflects a sizable takeover-style premium of roughly 33% over prior levels.
Why is GrainCorp considered an attractive takeover target?
GrainCorp is seen as strategically valuable because it has handled as much as 60% of eastern Australia’s grain crop and is described as the "last man standing" among major Australian grain companies. Acquiring GrainCorp would give a buyer a major foothold in Australia, the world’s second-largest wheat exporter.
Has foreign ownership been common in Australia’s agribusiness sector?
Yes. The article highlights a trend of foreign buyouts in Australian agribusiness—examples include ABB Grain (2009) and AWB Ltd (2010). Industry data cited show foreign investors now own half of the country’s licensed wheat exporters and significant shares of milk, sugar and red meat production via companies such as Viterra, Cargill, Fonterra, Wilmar, JBS and others.
What recent corporate activity has GrainCorp undertaken that investors should know about?
At the end of August GrainCorp paid $472 million to create a new oils business by acquiring the private Gardner Smith Group and Goodman Fielder’s Integro oils division. That deal included a $159 million capital raising at $8.80 a share, which is relevant context for assessing the company’s balance sheet and recent strategic moves.
What do analysts say about global food prices and how could that affect companies like GrainCorp?
The article reports global food prices are surging, driven by droughts and crop problems in the US, South America and Russia. Rabobank analysts predicted world food prices could hit an all-time high in early 2013 and remain elevated for at least 12 months—an environment that can boost revenues and strategic interest in grain handlers like GrainCorp.
Could other companies besides ADM bid for GrainCorp, and what might that mean for investors?
Yes. RBS Morgans and other market commentators expect multiple parties could be interested in GrainCorp given its scale and strategic assets, potentially triggering a bidding war. For everyday investors this can mean higher takeover premiums but also increased short-term share price volatility and uncertainty until any formal offers or clear outcomes emerge.
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