American wheat giant in hunt for GrainCorp

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 agribusiness 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 company Wilmar International. Wilmar is already a big 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 an oils business, acquiring the Gardner Smith Group and Goodman Fielder's Integro oils division. That 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 a record high in the first quarter of next year.