Graincorp's early harvest?

Amid reports of a move on Canadian grains giant Viterra, all eyes are turning to local player Graincorp.

PORTFOLIO POINT: Glencore's reported move on Canadian grains giant Viterra has prompted speculation that local agriculture stock Graincorp could be next.

Graincorp (GNC). Glencore’s reported move on grains mover and shaker Viterra could mean local sitting duck Graincorp is a step closer to being swallowed up.

Following reports of a £3.5 billion ($A5.2 billion) approach to Viterra by the commodities trader, Graincorp shares surged to an early high of $8.74 today, from their usual $7.90-$8 level. It’s on my top-10 takeover list and the reason its shares are up is because Viterra is one of the companies most likely to make an offer for Graincorp.

Interestingly, the Viterra approach is being made not by a larger industry player but by a commodities trader in the process of merging with miner Xstrata. And yet Glencore still wants to buy one of the biggest grain companies in the world, so the ripple effects of this move will impact on the Australian sector.

Firstly, it shows that interest can come from a number of different areas. There’s not much difference in buying and exporting grain to any other raw material – you buy the product, guarantee the price and agree to ship it to the end user – and Graincorp owns the infrastructure, so takeover interest could come from areas we hadn’t expected.

The second factor is that food companies around the world are consolidating and Australia is one of the largest producers of certain parts of the 'food chain’, as it were. Graincorp is one of the last and largest agricultural businesses left in Australia, so if you want to play the soft commodities takeover angle, this is an excellent way to do it.

Goodman Fielder (GFF). Another interesting soft commodities play is Wilmar’s sudden move onto the Goodman register.

Wilmar now owns 10.1% of Goodman and, from what I hear, is very interested in the company. It will need Foreign Investment Review Board approval to go past 14.9%, but for now Wilmar is at the 'phony war’ phase, where it’s uncertain as to what will happen next.

If Wilmar is going to buy the company, it’ll probably pay about a third less than it would have had to pay three years ago, simply because Goodman is being slammed by rising raw material prices and falling market share for its products. It’s also uncertain whether a bid will come in the short term.

We’re also hearing a lot of talk from Opposition politicians about restricting foreign ownership of agriculture-related companies. But you have to remember that takeovers aren’t approved on the floor of parliament, so I don’t think any future offer from Wilmar will be such a big issue politically. Goodman is also not a well-known Australian company in the public’s eyes, so I don’t foresee much trouble on that front.

There is a process for deciding these things. If it was a state-owned company, the situation would be different, but Wilmar is a well-known Singaporean company that already does business in Australia.

In the long run, I don’t think a Goodman or Graincorp takeover will push the government into becoming more protectionist. We’ve seen this sentiment in the past, yet foreign takeovers always seem to continue apace.

Austar United Communications (AUN). Foxtel’s $1.52-a-share bid for Austar is all but guaranteed to succeed, and it’s revealing much about the competition regulator.

Austar’s share price firmed in the last few weeks and at the current level of $1.465, is spot on for a takeover that’s almost certain to go ahead. There’s not much in it now – a mere 3.62%, in fact – but if you got in back in February when it was down at $1.17, you’ve made your money on this one; no one else is going to come in with a bid for it now.

ACCC boss Rod Sims has made it clear he’s reasonably comfortable with the undertakings Foxtel has agreed to, although there is one more round for public comments and competitors, such as Optus, may have something to say.

The thing I’m uncomfortable with is the ACCC trying to predict the future. It seems to be quite concerned with internet television (IPTV), and part of Foxtel’s commitment is to allow IPTV providers to use its platform.

However, this sector doesn’t really exist in Australia yet; the closest we have is Optus’ fight to show Aussie Rules almost-live over the internet, and it looks like it’s won round one of that debate. If the NBN is ever fully built, it could overturn everything we know about TV; with the speeds that may be available, it might mean the end of free-to-air television.

The ACCC should look at competition now and if it wants to look ahead, it should see that the future will be unbelievably competitive, as smaller players pile in. If anything, IPTV is the new thing and you don’t need to worry about supporting it. The biggest problem will be trying to prevent it from taking over completely.

Ludowici (LDW). The Takeovers Panel has come out and said that despite the fact that truth in takeovers used to be one of its policies, all the bids for Ludowici are legitimate and it now comes down to a good old-fashioned auction.

So you’ve got the Danes (FLSmidth) in one corner with $11, and UK company Weir Group in the other, with $10. Essentially, it now comes down to who will pay the most, because there are now no other roadblocks to get in the way.

Has Weir got another bullet in its gun? Probably. Will FLSmidth come back? Likely. The $11 bid isn’t going away and at $11.42 on Monday, Ludowici is getting very pricey, but if you did buy-in earlier it’s a pretty good bet on the likelihood of the bidding war continuing.

Gloucester Coal (GCL). After months of waiting, Gloucester and Yanzhou have finally revealed the details of their takeover deal, and it has utterly failed to excite anyone – it’s actually been tweaked away from Gloucester shareholders’ favour.

Gloucester investors now get a 44c special dividend and $2.71 cash, with the rest in shares in a new company. They also end up with about a 1% smaller share of said entity. It’s still arguably worth $10 a share, but you don’t get that value up front. What you mostly get is shares in a new merged entity down the track, and at this stage you don’t know where they will trade. There’s a guaranteed minimum trading level for these shares of $6.96 that lasts for 18 months, but it’s not the same as getting cash now.

REA Group (REA). There were rumours flying last week that News Corp might like to sell its 61.4% in online real estate advertiser REA, or that it might also like to do a mop-up bid. Either way, this company is clearly a takeover target.

There are three companies in Australia if you want to play the new media boom: Carsales, REA and SEEK. In my top 10 I picked Carsales, because of the three it’s the most dominant in its sector, but each one is a very good business.

All are a bit expensive, but all are likely to be bought by a News Corp, Fairfax or other old-media business looking to recapture some of the revenue and market share already lost to the three interlopers.

Moreover, if one was bid for, all will go up in price, so it doesn’t matter which you pick, because shareholders in all three are going to benefit no matter which becomes subject to a takeover offer.

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

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