BREAKFAST DEALS: GrainCorp grab

GrainCorp wont give ADM due diligence unless it offers a sizeable premium, and will collusion by 'big shareholders' be scrutinised more closely?

GrainCorp is reportedly not interested in talking to American suitor Archer Daniel Midlands for anything less than $13-$14 a share. While the directors have a solid case, they’ll have to keep the many GrainCorp institutional shareholders onside and remain aware of the potential for another discussion on agricultural protectionism to break out. Meanwhile, there are calls for the government to look at collusion between big shareholders, which is somewhat well timed as pressure on the Echo Entertainment board increases. And finally, Telstra has run into some troubles with the ACCC over its sale of TradingPost.

GrainCorp, Archer Daniel Midlands

The strategic importance of GrainCorp, the ‘last man standing’ of the major Australian grain handlers, has been clear for some time. At the tail end of 2011, the company was high on a number of ‘target lists’ for 2012, including one here at Business Spectator.

News that American soft commodities giant Archer Daniel Midlands (ADM) has paid $11.75 a share for another 10 per cent in GrainCorp, a 33 per cent premium to the company’s last trading price, comes as no surprise given the global consolidation in the sector. The Glencore International acquisition of Canada’s Viterra, which itself purchased Australia’s ABB Grain in 2009, headlines this movement.

In a statement on Friday, GrainCorp emphasised to the market that it hasn’t received a proposal yet, but the ADM move is the beginning of its attempts to commence discussions on a "potential transaction”.

With the company in a trading halt the board is reported to have met over the weekend to consider its options. The directors will have to strike a balance between playing the company’s attractive strategic position as a plus-point, without pushing the suitor too far.

Media reports indicate that GrainCorp won’t grant due diligence to ADM for anything less than $13-$14 a share. The top end of that range would translate to a bid of $3.02 billion for the whole company, more than 50 per cent higher than its last market cap reading of $1.91 billion.

Given that the broad earnings multiple averages for recent deals in agribusiness would translate to an offer of just over $12 a share if applied to GrainCorp, the company’s ‘above average attractiveness’ means that range isn’t altogether unreasonable.

But the fact that the board’s apparent range has found its way into the press in the first place could reflect an acknowledgement from the directors that they’ve always been in line for a deal can’t appear too unwilling to speak to a suitor.

Leaking figures of what the board thinks the company is worth is not a traditional M&A tactic. But the diminished activity in the Australian M&A market has forced target boards to be very cognisant of the desire of institutional shareholders to make a buck.

Indeed, if 10 per cent of the register was willing to sell at $11.75, there’s a good chance that other shareholders would be keen to get out also.

According to The Australian Financial Review, JP Morgan estimates that institutions make up 55 per cent of the GrainCorp register. While that figure isn’t exactly record-breaking, it provides the suitor with a long list of shareholders that don’t want to risk a premium for the sake of a few extra percentage points.

This is a reality that Spotless Group chairman Peter Smedley had to deal with when Pacific Equity Partners, its second private equity suitor, came knocking in late 2011.

Many institutions on the Spotless register were frustrated with the company’s long turnaround plan and enticed by the quick premium offered by PEP.

GrainCorp is crucially different from Spotless in this respect. It’s not in the middle of a turnaround, but enjoying the fruits of a well run business that’s strategically well positioned.

But the move also strikes at the heart of crucial national issue for Australia’s economy future. What role will international companies play in this country’s agribusiness sector?

The balance between Australia’s supply and China’s demand for hard commodities has shifted towards the customer and has all but solidified the notion that Australia’s resources boom is over.

That’s true for iron ore and coal, which have fattened up Canberra’s coffers in recent times. But the resources boom is to some degree simply shifting from hard commodities to soft commodities and Australia is brilliantly positioned to change stance in order to take advantage of this.

Canberra is in a less awkward position with this deal than the acquisition of the collapsed cotton farm Cubbie Station by Japanese and Chinese bidders, because ADM isn’t the customer of Australia’s agribusiness industry. Agricultural protectionists are very cautious of China’s desire to secure Australian farming assets.

But GrainCorp will be keen to encourage any interested rival players to emerge to make sure ADM is pushed as far as it can go. If a Chinese player throws its hat in the ring, the misguided debate about whether Australia will be capable if feeding itself thanks to international agricultural M&A interest could easily emerge.

And that apparent range that the board would engage with ADM over could just as easily be a carrot that GrainCorp has hung out for potential rivals.

Bidder collusion

In a matter that’s somewhat related to the discussion above, that being M&A regulation, The Australian carries an interesting story this morning about the growing use of tactics that don’t reflect the spirit of the Corporations Act by bidders.

The newspaper reports that law firm Arnold Bloch Lieber has written to Parliamentary to the Secretary Bernie Ripoll, urging the government to take action against so-called ‘coffee shop arrangements’ that allow minority shareholders to gain control of companies without paying a takeover premium.

The call comes after the Australian Securities Exchange’s latest proposed updates the rules governing takeovers and continuous disclosure.

Keep an eye on this issue. The stale state of the Australian M&A market has emboldened many potential bidders, domestic and international, to consider strategies that bully their targets into accepting offers lower than they otherwise would.

This strategy is the one that short changes the target’s shareholders the most.

Echo Entertainment, Crown, Genting

Indeed, one of the examples cited recently for this strategy, perhaps mistakenly, is the battle over Echo Entertainment. The gaming company has a Sydney casino licence on its books and two ambitious gaming billionaires, Australia’s James Packer and Malaysia’s KT Lim, on its register.

The reason why this particular example might not be appropriate is there’s little evidence to suggest that Packer and Lim plan to operate together.

Still, there’s just as little evidence to suggest that Packer wants to pay a premium for Echo to get that licence.

As The Australian Financial Review reports this morning, Echo is coming under increasing pressure to engage with Packer or Lim, which both want more than the 10 per cent currently allowed by regulators.

The newspaper reports that speculation in government circles Crown’s rival proposal to Echo might be to simply wait until the company’s casino licence monopoly ends in 2019.

Is there really room for both of them in Sydney? Echo will have to weigh this up when dealing with its potential partners, all the while knowing that a takeover premium won’t be willingly put forth.

Telstra Corporation, Australia Post

The competition regulation regulator has thrown some doubt on Telstra’s plan to sell its struggling classified business TradingPost to rival online advertiser Carsales.com.au.

Telstra has been considering the position of TradingPost in its portfolio for a long time, as the negative outcome of its foray into the advertising network market has become clearer.

But the most logical buyer is also one of TradingPost’s most successful competitors and the Australian Competition and Consumer Commission (ACCC) has concerns for the proposal.

"The ACCC’s preliminary view is that the proposed acquisition would remove Trading Post as one of Carsales’ closest and most effective competitors in the online automotive classifieds market,” ACCC boss Rod Sims said in statement on Friday.

"The Trading Post provides an alternative that is popular with dealers and private advertisers. We are concerned the proposed acquisition would remove this choice,” Sims added.

Telstra bought TradingPost in 2004 for $640 million, but the business has been consistently written down as the eBay, Google and local players like Carsales.com.au flexed their more nimble muscles.

The consumer watchdog has deferred its decision until the end of November, asking for more industry submissions in the meantime.

Competition regulation is a particularly dicey issue not just here in Australia, but around the world as empowered online operators challenge traditional industry structures, along with their competitive tensions.

One of the things that makes online players particularly troubling for regulators is the notion that the internet lends itself, in certain circumstances, to natural monopolies.

This is a hotly disputed area of discussion. Some argue the internet is ushering in the purest incarnation of competition, and therefore capitalist principles, that we’ve ever seen thanks to the relatively low costs associated with rival start-ups. The decline of traditional newspapers is a great example of this.

But some counter that the internet actually appears to encourage effective monopolies and oligopolies. Think about the dominance that players like Google, Facebook and indeed eBay have over their global markets.

This is perhaps the most challenging issue for competition regulators around the world brought on by the digital age.

TradingPost is struggling thanks in turn to the rise of Carsales and eBay.

Allowing an already strong competitor to acquire it might lower competition in the sector, but it might also lend strength to a domestic player that’s operating in a market geared towards consolidation.

Wrapping up

Free-to-air network Ten Network will be the subject of ongoing speculation until the final outcome of its sales process for outdoor advertising company EYE Corp is revealed.

Ten had a really tough time last week. The share price lost 24.3 per cent in total as poor results and news that CHAMP Private Equity had terminate discussions for a $145 million deal combined.

The broadcaster said that discussions about EYE Corp were ongoing, but the question the market was asking is how keen CHAMP still is on securing the asset.

The Australian Financial Review understands that the private equity firm still wants EYE Corp, which could be married with its oOh!media business.

That’s good news for Ten shareholders, but they can kiss that ‘up to $145 million’ figure goodbye.

And finally, the Australian Shareholders Association has reportedly corrected the ledger on the Gordon Merchant’s stake size in the company he founded, but it’s still recommending he be voted out at the upcoming annual general meeting.

According to The Australian, the ASA has corrected its earlier reference to Merchant being the "majority shareholder” in Billabong, as he actually only commands around 15 per cent. From what this columnist can tell, that mistake was first pointed out in this Breakfast Deals column.

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