DataRoom AM: GrainCorp conservation

The Abbott government appears to have made a big mistake in knocking back Archer Daniels Midland’s bid for control of GrainCorp. In so doing they have fired up the protectionists, called into question their ‘open for business’ slogan and brought populist politics once again to the forefront. The whole episode would make anyone wonder whether the government is really serious about a debate on Qantas ownership.

Elsewhere, plans for the privatisation of Medibank Private progress, Saputo receives a blow in its pursuit of Warrnambool Cheese and Butter and a Canadian pension plan divulges its interest in the possible auction of Queensland Motorways.

GrainCorp, Archer Daniels Midland, Joe Hockey

The “no surprises”, “open for business” Abbott government lasted all of two-and-a-half months. Joe Hockey’s Nationals-tainted decision to block Archer Daniels Midland’s $3.4 billion bid for control of GrainCorp brought a swift end to all that.

It can only be described as a political decision, given the sale was neither likely to substantially reduce competition nor provide state secrets to an overseas company.

The problem with the arguments against the sale are they are largely based on the premise Archer Daniels Midland would be more likely to short change Aussie grain growers than the ASX-listed GrainCorp. It is not logical as GrainCorp management is working for its shareholders just like ADM and would harbour no more noble intentions than its suitor in this regard. Indeed, it is a borderline xenophobic reaction, though that’s not to say Australia is on its own in this regard.

In truth, protectionism remains alive and well around the world and, as such, the Abbott government decision will likely not cripple foreign investment in Australia.

But that doesn’t make it right.

The biggest problem for the Coalition is its explanation, which has been weak, at best.

Tony Abbott, as an example, offered this over the weekend:

“Two points – we are one of the world's most open economies and I doubt that there would be any other G20 economy where a large foreign business would have been able to purchase an effective monopoly of a major industry here in Australia ... The other point I'd make is that Treasurer Hockey has decided 131 foreign investment applications and 130 of them have been approvals.”

The first point shows Abbott either doesn’t trust the competition watchdog – the Australian Competition and Consumer Commission – or didn’t bother reading its report.

“The ACCC concluded that the proposed acquisition would be unlikely to substantially lessen competition as the merged entity would continue to face competition from a number of sources,” ACCC Chairman Rod Sims said back in June.

In other words, GrainCorp is not a monopoly business, which makes Abbott’s first argument moot. It is also concerning that this line of thought has pervaded through the psyche of key Coalition members. If your ‘facts’ are wrong you can’t possibly make an informed decision.

His second point, which was also stressed by Hockey on Friday, is irrelevant as few of those 131 foreign investment applications were of much significance. The number of big foreign investment decisions defines how a government is judged and the Abbott government has made two: the GrainCorp rejection and rushed approval for Canada’s Saputo to claim Warrnambool Cheese and Butter.

Hockey, too, was not forthcoming with any strong reason why the deal was rejected, instead suggesting competition hadn’t yet formed in the market and, worryingly, referencing apparently soft public popularity for the deal.

“A further significant consideration was that this proposal has attracted a high level of concern from stakeholders and the broader community. I therefore judged that allowing it to proceed could risk undermining public support for the foreign investment regime and ongoing foreign investment more generally.”

The Gillard-Rudd governments were often, and at times rightly, criticised for making ‘populist’ decisions by none other than a Tony Abbott-led opposition. Now the shoe is firmly on the other foot.

The argument doesn’t pass muster because few foreign takeovers of any significance don’t have a degree of public backlash. Indeed, this decision will only further fire up the protectionists among us.

It was left to the Nationals’ Barnaby Joyce, a long-time critic of the deal, to sum it up best.

"Overwhelmingly people wanted this rejected and, in the end, they wanted it rejected not only in regional areas but in polls that were had in urban areas as well.”

Those urban polls were the killer.

According to some the Hockey decision at least buys Australia time to work out effective strategies about food chain and food security issues moving forward. Buying time, however, is only valuable if it is used effectively and the political landscape over recent years offers little hope for that.

GrainCorp and ADM, meanwhile, aren’t immune from criticism either, with both companies at fault for a drawn-out process that could have ultimately been decided by the previous Labor government. Arguably they should have looked to quell growers’ concerns earlier as well, with the last-minute sweetener seemingly coming too late.

ADM, too, may have been better served had it not relied on a fly-in, fly-out approach to discussions with farmers.

While there is plenty of blame to spread around, GrainCorp shareholders felt the brunt of the backlash with the company’s securities slumping 26 per cent on Friday. ADM, meanwhile, lost 3 per cent in US trade.

Qantas Airways

In light of the GrainCorp decision it is staggering there is even a public discussion on full foreign ownership of Qantas Airways. If Joe Hockey is to put populism into play for all foreign ownership decisions (see: above), then there is no chance Qantas will be allowed to be majority foreign-owned. End of discussion.

The irony of the debate is Qantas is seeking protection from the Australian government while positioning for greater foreign ownership.

The Alan Joyce-led national carrier is particularly keen for a government guarantee of its debt, given ratings agencies are reportedly close to marking it with junk status. The other options floated are a relaxing of foreign ownership restrictions and a purchase of equity in the airline by the government.

According to The Australian, there is a lot of resistance in federal cabinet to the guarantee and equity purchase options, while relaxing foreign ownership laws will go against the populism approach.

With Tony Abbott flagging a go-slow approach on the issue, it could be several months before any concrete decisions are made and that may leave Qantas little choice but to pursue either a capital raising or sale of assets.  

At this point, Qantas shareholders would probably rather the company tilted its focus to new plans rather than persistent lobbying of the government.

Medibank Private

The federal government has announced the winners of a tender process to conduct a scoping study on Medibank Private. The appointments of Lazard Pty Ltd as business advisor, Herbert Smith Freehills as legal advisor and Ernst & Young as accounting advisor were confirmed on Friday.

The advisors now have until the end of February to complete the study, which is slated to assess the timing, structure and legal ramifications of a sale. It is widely expected to recommend a float of the government-owned business.

Medibank Private has been value as high as $4.5 billion, though based on its latest earnings result, $3 billion to $4 billion appears the most realistic number, even if the IPO market stays hot.

If an IPO is preferred, expect it to occur in the fourth quarter of 2014 or first quarter of 2015, offering assistance to Hockey’s first budget.

Warrnambool Cheese and Butter, Saputo, Bega Cheese, Fonterra

The Takeovers Panel has thrown another spanner in the works in the race for control of Warrnambool Cheese and Butter, with an interim order for Saputo to stop processing acceptances received for its proposal.

The orders will remain in place until further order of the panel or the determination of proceedings. If neither is forthcoming within two months, then the interim order will cease to be enforced.

The development comes after fellow suitors Bega Cheese and Murray Goulburn Co-operative filed a complaint that the latest alteration to Saputo’s bid was misleading for WCB shareholders.

Saputo currently holds 9.6 per cent of WCB, a significant lift on where it started the week.

Meanwhile, Fonterra has confirmed an increase in its stake in Bega, from 6 per cent to 9.06 per cent. The New Zealand dairy giant is considered a friendly shareholder and has indicated it is building the stake in the group to protect its professional relationship with Bega should any takeover activity be directed the Aussie company’s way.

Queensland Motorways, La Caisse de dépôt et placement du Québec

La Caisse de dépôt et placement du Québec, the giant Canadian pension fund which claimed a 26.7 per cent stake in Port of Brisbane last week, may not be done with acquisitions of infrastructure assets in the Sunshine State. The fund has confirmed interest in the possible sale of toll road operator Queensland Motorways, which could sell for over $5 billion.

“Queensland Motorways could potentially be an opportunity for us,” Macky Tall, senior vice president of infrastructure at La Caisse, told DataRoom. “But it’s difficult to say, as information is lacking at present.”

It is the second group to display interest in the asset after the ASX-listed Transurban Group did likewise last month.

It is likely a joint venture will end up getting a deal done; though there remains speculation Queensland Motorways’ owner Queensland Investment Corporation could instead pursue a float.

Wrapping up

Travel insurance broker Cover-More’s plans for a pre-Christmas listing are on track, with The Australian Financial Review reporting the company has raised a tick over $500 million from cornerstone investors, at $2 a share. The firm’s private equity owner Crescent Capital Partners will retain a small stake in the business, which is expected to list this month with a market capitalisation of close to $650 million.

Meanwhile, the IPO of Nine Entertainment will receive its first big test on Tuesday as the bookbuild for a raising of close to $700 million goes ahead. The company will hit ASX boards on Friday with a market capitalisation of around $2.2 billion.

Finally, in agriculture, there is a push for the nation’s second biggest wheat exporter, Western Australian-based CBH Group, to pursue a sale or float of the co-op. According to The Australian, such a move could unlock value for its farmer owners, with the company worth as much as $5 billion.