GrainCorp's strategic value a game changer

The $2.7 billion Archer Daniels Midland ‘'offer'' for GrainCorp may have been at a 33 per cent premium to its previous share price but the sharemarket reaction today underscores the reality that it is well short of the price of success.

The ADM offer isn't actually yet an offer. GrainCorp said today it had received an ‘'indicative, non-binding proposal'' from the US agri giant that was subject to a number of conditions including due diligence, exclusivity and approval by the ADM board.

The combination of conditions, particularly that final condition making any offer subject to its own board's approval, effectively means ADM wants a free option while it kicks GrainCorp's tyres and decides whether to push ahead with a bid.

The GrainCorp board and its advisers from Credit Suisse and Greenhill Caliburn aren't likely to open the books to a due diligence process, let alone grant ADM exclusivity, at that price or on those terms even though ADM crashed onto the GrainCorp register last week and holds a 14.9 per cent economic interest after executing a derivatives play.

The market reaction, with GrainCorp shares shooting up to around $12.50 when the trading halt was lifted, says it believes there is significantly more value in the company than the
$11.75 a share ADM has indicated it might offer.

GrainCorp is the last of the major listed Australian grain handling companies. It dominates east coast grain handling with its comprehensive infrastructure, including seven ports. It is also one of the world's largest commercial malt producers and recently added an edible oils division to its portfolio of agricultural commodities.

It is a high-performing company in a strategically important sector, located close to the growth region for soft commodities, Asia. The wave of global consolidation plays in the sector in recent years underscores its strategic value and the premium that ought to drive in any takeover.

ADM is probably, of course, keeping its powder dry. It would be well aware that there are other big players in the sector pursuing acquisition and consolidation strategies, anxious to lift their exposures to Asia as living standards continue to rise in the region and to diversify their sourcing and product ranges.

There aren't that many independent players of substance left in the sector, particularly in this region, so there is a scarcity aspect to GrainCorp that ought to force all the global players to consider their options.

ADM would also know that it requires Foreign Investment Review Board approval for the transaction and that GrainCorp's east coast dominance at a time when foreign acquisitions of agricultural interests are of political significance and sensitivity will ensure its approach is well-scrutinised.

There's no rush for it to put its best price on the table, which is why its bid tactics so far look more like a private equity play than that of an industry player.

The fact that it has put its foot on 14.9 per cent of GrainCorp does provide a tactical advantage over any aspiring rivals, although it is common for US bidders to take out a stake in their target so that they at least cover their bid costs in the event that they lose out to a rival offer.

The price and the conditionality – and the prospect of other parties entering the contest – mean that Alison Watkins and her board won't be under immediate pressure from the market to
engage or to offer exclusivity or due diligence. The market appears to believe something above $13 a share, or $3 billion-plus, is required if an offer is to succeed.

GrainCorp's response has so far been quite neutral, although it did refer today to its ‘'unique portfolio of integrated, strategic assets'' and said it was confident in its outlook and strategy and their ability to continue to deliver shareholder value.

The group has a full-year results presentation scheduled for next month, which will give in an opportunity to both unveil its current performance and talk about its strategies and outlook.

Its interim earnings were up 39 per cent to $122 million and it has steered market expectations towards the top end of its guidance range of $185-$205 million. It is also optimistic about the prospects for the edible oils businesses it acquired for $472 million earlier this year.

Assuming no second-half hiccups in its performance, it is well-placed to mount a defence against the offer ADM has foreshadowed and make the argument that its strategic and scarcity value within the global industry and market contexts dictates that the price of a successful offer should be a dazzling one.