Making hay from Graincorp

With takeover interest in Graincorp having waned, it may be time to reduce holdings.

Summary: Canadian group Archer Daniels Midland hasn’t walked away completely, but its interest in Graincorp since late last year appears to have waned. Since rejecting ADM’s $12.20 a share bid, Graincorp shares have slid to $11.53.
Key take-out: In the current market, and in the absence of a takeover bid, Graincorp shares could fall back further.
Key beneficiaries: General investors. Category: Portfolio management.

Graincorp (GNC)

I recommended this company as a takeover target a long time ago, and before it had received a takeover bid I listed it as one of the most prospective stocks (Our top 10 takeover targets revealed). Archer Daniels Midland then came in late last year (see Graincorp harvest could get better) and made two bids for the company, with the second at $12.20 a share rejected. In the quiet that’s followed I feel it may be time to reduce holdings.

For a while the stock traded above the bid price and I suggested investors should take profits when it traded above $12.50. Since then the stock has fallen down to around the $11.50-60 mark, and nothing formal has been heard from Archer Daniels Midland since before Christmas. Part of me thinks ADM is biding its time – Graincorp releases half-year profit results in a month and I would imagine ADM will be looking at these closely. But another part of me is concerned that if it walks away from the deal completely (even though it does own 20% of Graincorp), there is every chance in the current market that the stock would fall back to the $9.50-$10 mark.

If the interim results are good ADM may well look at coming back, reaffirming or increasing its offer. If, however, the weather has been unkind – Graincorp is an agricultural stock after all – then it may not. The fact that we haven’t heard anything at all, and Graincorp has had no contact with ADM, has made me sufficiently worried that a bid could be off the table for the time being. I think it’s not worth eliminating as a target, but perhaps reducing one’s exposure.

Anyone who bought in early has done very well, and for those who bought at around $12 it may be worth mitigating the risk of a 20% fall by taking losses of around 4% now. There’s still a chance ADM could come back, but I have some doubts developing.

Australian Infrastructure Fund (AIX)

More positively, Australian Infrastructure Fund confirmed its payment timetable yesterday and the numbers look good.

The timetable has blown a little bit. Originally the best case was that you would get the larger payment between $2.95 and $2.98 by the end of April, and that is now the end of May. The residual payment of 24-25c previously said to be between June and December has now firmed up as July.

In November I ran a table of annualised rates of return for this deal (click here) and I’ve updated that with the new timetable.

Best case

16/04/2013

31/05/2013

31/07/2013

Buy AIX

-$3.120

Brokerage

-$0.007

Distributions (cash)

$2.98

$0.25

Distributions (franking)

$0.03

$0.02

Annualised return

41.9%

Worst case

16/04/2013

31/05/2013

31/07/2013

Buy AIX

-$3.120

Brokerage

-$0.007

Distributions (cash)

$2.95

$0.24

Distributions (franking)

$0.03

$0.02

Annualised return

29.8%

The only unknown remaining now is the concerns about a potential lawsuit from AustralianSuper. This means there is a small possibility the company might decide to hold back a small chunk of the payment, say 5c a share, so that it has got some cash just in case. However, AIX didn’t even mention a lawsuit and, as far as I can tell, none has been launched. In fact some hedge funds are apparently threatening to sue AustralianSuper if it tries to hold this deal up. My view is that it will all be OK.

Would you buy at this price? There are fantastic rates of return on offer – but that’s because you’re making your gains in a short amount of time. There’s a total of about $3.26 on offer at the most, but remember you’re paying $3.12 – so it’s a good return, but it’s not huge.

Homeloans (HOM)

A brief note on the listed mortgage company Homeloans. I now consider this to be a potential takeover target following some action on the registry.

Macquarie Group announced this week it had bought just under 20% of the company from Challenger off-market for $20.1 million, or 95c a share. It was a premium of 20c a share to the stock’s closing price when the deal was done last Friday.

Given Macquarie’s recent joint venture with Yellow Brick Road (YBR) to enter the Australian mortgage market, Homeloans could be picked up and merged with the lender.

Woodside (WPL)

Finally, Woodside decided late last week to abandon its Browse onshore processing centre and it may now go for a cheap alternative. The good news is that the Woodside’s share price rose – and because it will save a lot of capex, whatever it does now, there is the feeling that the company could actually return some money to shareholders. I wouldn’t be so certain about that.

Shell is still sitting there with its 24% stake, and it will no doubt be pleased and might even be pressing Woodside to commit to some sort of capital payment. From a takeover perspective Woodside has been a possibility for a while, and we know Shell’s stake is for sale. But no one’s come out of the woodwork and nothing’s changed on that front.

My thinking, if one was to do anything at all, is to maybe sell a little bit into the strength of Woodside at the moment – take some money off the table. The oil price is under a bit of pressure, and the Browse announcement is a real wake-up call. The fact that Woodside is not immune from cost pressures shows that no one is immune.


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

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