Farm profits depart as locals sit on sidelines

Asked why foreign groups thought Australian agribusiness groups were worth buying when locals evidently did not, GrainCorp chairman Don Taylor said first that it was a discussion for another day.

He was fronting the media to report that six months after being approached, GrainCorp was backing a sweetened $3 billion-plus bid from US group Archer Daniels Midland (ADM), and wanted to focus on that.

Taylor did say, however, that this market was caught in a time-warp. Agricultural companies didn't run to the quarterly or six-monthly performance cycles that guided the investment decisions of superannuation fund operators in this country, he said. They laid their plans and considered the results over periods that ran for about five years. That required patient capital, and while there were investment funds that were able to supply it in the United States, it was in short supply here.

The wave of foreign takeovers of local grain groups that will leave just one major Australian player standing after GrainCorp falls to ADM is also arguably a result of overregulation of the market, initially by the states, and then by the federal government.

Domestic trade was government-controlled until the mid-'90s, and the single-desk export monopoly existed from the late 1930s until 2008, first in the hands of the Australian Wheat Board, and then with its successor, AWB. When the export market was finally liberated in 2008, Australia's grain industry was still significantly confined to state "silos". Big overseas agribusiness and agricultural commodity groups had grown in deeper and less heavily regulated markets and they quickly moved in.

The South Australian grain handling group ABB was taken over for $1.6 billion by a Canadian agribusiness group, Viterra, in 2009. Viterra itself was taken over by the giant Glencore commodity trading group late last year.

AWB received a merger offer from GrainCorp in 2010, but another Canadian group, Agrium, launched a successful counter-offer. In 2011 it broke AWB up, retaining AWB's Landmark chain of rural agencies, and selling the grain handling, storage and trading arm to one of the US agribusiness giants, Cargill.

A host of other overseas operators including Bunge of Argentina, Mitsubishi and Marubeni of Japan and Olam of Singapore are active here, and if ADM's takeover of GrainCorp goes ahead as planned, there will be only one major Australian-owned player left - Western Australia's Co-operative Bulk Handling. It dominates the grain trade in that state, and has a national market share of about 30 per cent. GrainCorp has a similar national market share, based on the eastern seaboard.

ADM contacted GrainCorp and proposed a takeover pitched at $11.75 a share in mid-October last year. The US group and its advisers, Barclays Capital and Citigroup, had erected a blocking stake by snapping up 15 per cent of GrainCorp's shares. But the Australian group and its advisers, Credit Suisse and Greenhill, played a patient game.

The first indicative offer was politely rejected even though it was pitched $2.90 or 33 per cent above Graincorp's pre-bid price of $8.85.

ADM bought more GrainCorp shares to move to the 20 per cent takeover threshold early in December, and then proposed a $12.20 a share takeover, boosting the premium to 38 per cent.

That too was rejected, but politely: GrainCorp's board said the offer still materially undervalued the company, but added that it would be "constructive" about proposals that were in the best interest of shareholders.

That was an open invitation, and Graincorp chief executive Alison Watkins did say on Friday that there had been contact with other interested parties, both directly and through advisers. GrainCorp was mainly reaching out to its confirmed suitor, however, and as things went quiet on the surface after Christmas, back-channels between GrainCorp and ADM remained open.

The breakthrough offer of $13.20 a share is pitched at a 49 per cent premium to GrainCorp's price before ADM first approached, and was reached by adding a $1 fully franked dividend paid out of Graincorp's retained earnings. Franking credits on the dividend could be worth another 43¢ in the hands of shareholders, according to Watkins, and in what appears to be a first, the companies have agreed to insure GrainCorp's shareholders against regulatory delay by adding 3.5¢ to the proposed dividend every month from September 30 if the takeover has not completed. Regulators including the Foreign Investment Review Board, the Australian Competition and Consumer Commission and China's Ministry of Commerce, MOFCOM, will review the deal, and MOFCOM does not hurry.

ADM's bid is conditional on confirmatory due diligence, regulatory approvals and 50.1 per cent minimum acceptance, but is odds on to succeed. Counter-bids could emerge, but Graincorp cannot seek them, and ADM has its foot on 19.9 per cent of the company, plus a right of reply to any rival proposal.

As ownership of the bulk of Australia's grain trading industry heads overseas, the contrast with the mining sector is interesting. Australian companies tapped foreign debt and equity reservoirs to fund their growth, but local ownership of the sector is still significant. The world's biggest miner, Melbourne-based BHP Billiton, is still 40 per cent Australian owned, for example.

Agricultural commodities, if anything, have an even healthier long-term demand outlook than commodities like iron ore and coal as Asia's middle class expands. In Australia's grain market and others including sugar where foreign buyers have been active, most of the profits beyond the farm gate will be collected elsewhere, however.

mmaiden@fairfaxmedia.com.au