Graincorp harvest could get better

Investors in Graincorp already have good returns … but a higher offer may come.

PORTFOLIO POINT: Spring has brought good yields for Graincorp investors, and there’s a decent chance that a new bidder could emerge.

Graincorp (GNC)

Rumours began circling about long-time takeover target Graincorp (see my Top 10 targets, July 4), when market-watchers noticed a large parcel of shares change hands early Friday morning. Since then the eventual buyer has emerged as Illinois-headquartered US soft commodities giant Archer Daniels Midland (ADM). Graincorp went into a trading halt on Friday morning and received an indicative proposal for an $11.75 a share cash takeover that afternoon.

ADM owns a 14.9% economic interest in Graincorp, which is the maximum it can own without Foreign Investment Review Board (FIRB) approval. This bid is conditional on due diligence, though you’d expect it would go ahead given they’ve already bought 15% of the company, and it’s a healthy premium on the $8.85 where it closed prior.

Grain is a globally consolidating industry, and, sadly for Australian investors, Graincorp is pretty much the last locally listed big agricultural stock you can buy. The North American grain handlers are diversifying, because, as we’ve seen in the past 12 months, there’s often a drought in the US and Canada while there are good conditions here, and vice versa. It makes sense to have a foot in both parts of the world.

The big question for investors, then, is whether the deal will go through. The price is broadly in line with similar deals being done overseas in terms of multiples, but it’s at the cheap end. Even so, it might be enough, though I suspect the board will ask for a bit more. There’s no formal recommendation yet, and while ADM is trying to characterise the bid as friendly, it’s only friendly if the target board accepts it. Then there’s regulatory approval. Queensland premier Campbell Newman stuck his oar in the water and said they’ll have too much market power, but ADM don’t have much involvement in the Australian market so I can’t see the ACCC getting involved. As for the Foreign Investment Review Board, it was quite happy for ABB and AWB to be taken over, and even though the last bid in a chain is potentially more controversial I would be surprised if the FIRB knocked this back. There will no doubt be political pressure, you can imagine the Nationals will have something to say, but the FIRB is supposed to be above that. It’s unfortunate from an investment perspective, but that’s the way it goes.

Graincorp re-opened today at $12.50, before drifting to close at $12.30, still firmly above the bid. GrainCorp is very attractive. It’s a world-class collection of assets, and the market is anticipating either a rival bidder (Wilmar and Glencore are possibilities) coming in or a sweetened offer from ADM. I’ve seen some analysis suggesting a price between $12 and $14 a share would get the deal done.

My general rule is not to pay more than 3% above the bid – in this case roughly $12.10 – and this should hold here. Absent a bidding war, if $13 a share is the upside scenario and the bid’s at $11.75, then at $12.40 you’re upside is less than your downside. So for the time being it may pay for investors to just wait and see how it settles.

For investors already holding Graincorp from the point of view of picking a target in advance, however, it’s been a big win – the bid premium is almost 33%.

Acer Energy (ACN)

There have been two developments in the bid for Acer, where Drillsearch (DLS) currently sits on-market at 25.5c. Both are positive.

Firstly, Senex Energy (SXY) has increased its stake from 6.4% to 7.6%. That means it’s continuing to buy on market and is obviously paying a much higher price than the 25.5c bid.

Secondly, Acer has just announced this morning what it describes as a “major resource upgrade” – a 280% increase of in-place oil equivalent resources at one of its fields. Now, you’ve got to be a bit cynical about big resource upgrades in the context of takeover bids. It’s amazing how many resource companies suddenly find more oil, gas, copper, gold or whatever when they’re being taking over. That said, it certainly doesn’t hurt and it’s better than saying “Oh well, we’ve drilled a hole and there’s nothing there”.

I think the Senex buying is more important, and really very good. Senex is putting its hands in its pockets, there’s a bid on the table with something of a hard floor, and for people who don’t mind a bit of a punt this could be a good opportunity.

The problem is the bid is at 25.5c, and the stock closed today at 29c, so investors would have to pay considerably over. The downside is as much as 14%. So it’s not an out-and-out ‘buy’, but with Senex paying up, and continuing to buy stock at current prices, it suggests there is something to be had there.

Sundance (SDL)

There’s also good news for Sundance, potentially, although I’d still be inclined to stay away. Suitor Hanlong saying it has financing; originally it was one bank and now it’s two banks. So the board has said that two financing letters are good enough for them to proceed with what they call their ‘Scheme Implementation Agreement’; that’s just basically the two companies working together to organise the shareholders meeting.

They have put back the whole process by 11 days – from December 31 to January 11 – and that’s not unusual at that time of the year. People disappear on holiday, and it gets harder to get things done.

Does this mean the bid is definitely going ahead? No. They’ve got financing, and it helps, but it’s not a done deal yet. If the deal is in a form that can be accepted, I’d say shareholders will grab the 45c and run. But if China’s National Development Reform Commission stops it, or the price of iron ore falls over again, it can’t be guaranteed. It’s improving, but this is not one for the faint hearted.

Ten Network (TEN)

Another of my 10 takeover targets, was, appropriately, Ten, and shares in that company have been absolutely smashed, hitting all-time record lows and closing at 28c on Friday.

Ten has been bankrupt before, 20 years ago, and back then it was a cyclical problem. I believe now there’s some element of cyclicality, but TV, along with much of the media, has big structural flaws which I’ve written on before.

However, Ten has these big shareholders on its side with very deep pockets – Lachlan Murdoch, James Packer and Gina Rinehart. A lot of people are saying they could privatise it; just put 45c a share on the table and buy the whole thing.

I wouldn’t buy it on that basis. My rule is that you’ve got to be happy to own it in the absence of a bid, and Ten at the moment doesn’t meet that criteria. If I was Gina Rinehart I’d be looking at what Nine has just gone through, where people who bought too much of it at the wrong time ended up losing everything, and maybe thinking about cutting my losses.

Just to overcome any confusion about my position on Ten Network Holdings in my article on takeover targets (Our top 10 takeover targets revealed, published July 4), I have always maintained that the stock is best avoided despite its various high profile shareholders. This is due to the severe structural headwinds facing free-to-air TV.

Continuous disclosure

The Australian Securities Exchange (ASX) released a discussion paper last week on continuous disclosure, which is particularly relevant to mergers and acquisitions – this year saw details leaked to the media on indicative proposals for Billabong (BBG), Pacific Brands (PBG), Spotless (SPT) and the particularly controversial David Jones (DJS) bid, amongst others.

Just in general, I think it’s better that companies disclose things. What’s changed in the world now is that rumours get out quickly because of social media, and people have more anonymous ways to distribute it. Information leaks in a way that it never used to.  As a result, if boards don’t put information out there they run the risk of rumours overtaking and becoming a reality anyway.

What they’ve got to do, and as we learnt from David Jones, is to be absolutely clear about the information. If it’s simply that the company’s received an odd-looking takeover via fax from a company no one has ever heard of, then fine, but it needs to be clear. Continuous disclosure is, in my view, more important than ever.


Tom Elliott, a director of Beulah Capital and MM&E Capital,may have interests in any of the stocks mentioned.

Takeover Action October 15-19, 2012

DateTargetASXBidder(%)Notes
3/10/2012Acer EnergyACNDrillsearch19.90Extra 18.82% committed
15/10/2012AlescoALSDulux Group65.83
18/10/2012Bremer Park BPKWalker Corporation94.30
5/10/2012Clearview WealthCVWCrescent Capital Management79.67
19/10/2012Exco ResourcesEXSWashington H Soul Pattinson55.68
26/09/2012Fisher & Paykel Appliances HoldingsFPAHaier37.46Incl 17.46% lock up
17/10/2012Hastings DiversifiedHDFAPA Group72.14Recommends offer
24/08/2012Hastings DiversifiedHDFPipeline Partners8.75
16/10/2012LinQ Resources FundLFRIMC Resources59.30
15/10/2012MinemakersMAKUCL Resources3.39Offer lapses
15/10/2012MintailsMLISeager Rex Harbour40.33
16/10/2012Plan B GroupPLBIOOF Holdings99.11Delisted
29/06/2012Real Estate Capital Partners USA Property TrustRCUWoolley GAL II32.81Incl associates' holdings
1/10/2012United OrogenUOGIron Mountain Mining78.55Unconditional
18/09/2012Western Desert ResourcesWDRMeijin Energy Group0.00
Schemes of Arrangement
20/09/2012CGA MiningCGXB2Gold Corp0.00Vote Oct 31
24/09/2012Consolidated Media HoldingsCMJNews Ltd0.00Binding proposal
6/08/2012Integra Mining IGRSilver Lake Resources0.00Vote late Nov
2/08/2012Sundance ResourcesSDLHanlong Mining Investment17.99To complete in Nov
14/09/2012WAM CapitalWAMPremium Investors0.00Vote late Nov
Foreshadowed Offers
1/10/2012ArriumARIPosco/Noble Group Consortium0.00Non-binding proposal
12/10/2012Billabong InternationalBBGTPG International 0.00Offer withdrawn
4/10/2012EldersELDRuralco0.00Possible Elders Rural transaction
19/10/2012GraincorpGNCArcher Daniels Midland14.90Trading halt. ADM seeks discussions
5/10/2012Macmahon HoldingsMAHNo party0.00Suspended on false rumours
21/05/2012PMPPMPTMA Group0.00Indicative offer
4/10/2012Real Estate Capital Partners USA Property TrustRCUSaban Capital Group0.00Indicative offer
15/10/2012Westside CorpWCLNo party0.00Seeks firm proposals

Source: NewsBites

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