Patient Graincorp reaps a bumper harvest

Graincorp's decision to hold out on earlier Archer Daniels Midland bids means shareholders are now likely to receive over $14 in value from a highly strategic takeover.

Last year’s repeated but polite rejections of Archer Daniels Midland’s overtures by the Graincorp board have been vindicated by the $3 billion agreed offer the companies announced today.

From the moment ADM increased its Graincorp shareholding to just under 20 per cent last year – and its indicative offer from $11.75 a share to $12.20 a share – it was really only a matter of time and dollars before ADM’s attempt to acquire the last available southern hemisphere agribusiness succeeded, particularly as a significant slice of Graincorp’s capital is in the hands of hedge funds drawn to the group by ADM’s initial approach.

Graincorp has been well aware that, while this year is likely to produce another very strong earnings performance on the back of a bumper crop, the outlook for 2013-14 isn’t quite as positive given the likely weaker contribution from its grain handling and marketing businesses.

While its expansion into processing activities has dampened the volatility of the group’s earnings and chief executive Alison Watkins last year initiated a business improvement program forecast to generate an extra $110 million of earnings over the next four years, Graincorp does remain exposed to agricultural cycles.

With ADM making it clear it wasn’t going away and was prepared to wait for the cycle to turn and make Graincorp vulnerable and Graincorp itself demonstrating an unemotional attitude towards the prospect of being acquired, there was always the possibility of a pragmatic and agreed outcome, particularly as ADM had made it clear it wanted access to due diligence before it committed to an offer.

The conditional deal unveiled today saves some face for ADM, which will notionally leave its offer price unchanged from the $12.20 a share it put on the table last December. It has agreed, however, that if its offer proceeds (it is subject to the satisfactory outcome of a limited due diligence process) Graincorp will also pay a dividend of $1 a share.

Graincorp expects the dividend will be fully franked and, as it noted, that would effectively add up to another 43 cents a share of value to shareholders, depending on their tax rate. It has also negotiated a clause in its agreement that provides for additional dividends of 3.5 cents a month if ADM doesn’t obtain all its regulatory approvals by October 1.

Given that Graincorp shares were trading below $9 a share before ADM revealed its interest via a sharemarket raid last October, that is an excellent outcome for Graincorp’s shareholders. In effect Graincorp’s board has managed to get ADM to bid against itself, off what was already a very high base, for the third time.

For ADM, however, Graincorp is a highly strategic business. It sits on the edge of an Asia Pacific region where demand for agricultural commodities is expected to grow explosively over the long term. Graincorp handles about 75 per cent of Australia’s east coast grain production and more than 90 per cent of its bulk grain exports. It is also one of the world’s largest malt producers and has, more recently, built up a substantial position in edible oils.

Moreover, with ADM’s own interests primarily in the northern hemisphere, it represents a major diversification for the US group and a consequent reduction of the risks in its inherent exposure to weather. With the global industry consolidating rapidly, and Graincorp the last of the big listed Australian agribusinesses, it was possible to justify a big strategic premium.

Graincorp directors have indicated that, in the absence of a superior offer and subject to an endorsement from an independent expert, they will recommend the offer, which has a minimum acceptance condition of 50.1 per cent.

It is unlikely that there will be any competing offer, given ADM’s shareholding, the level at which its bid is pitched and the restrictions on the Graincorp board soliciting a rival proposal. Graincorp has had a long time to explore its alternatives before committing to ADM.

The outcome unveiled today validates the view of the Graincorp board, and some analysts, who from the outset believed the group had sufficient strategic value to demand an offer price with at least $13 a share in front of it. With the dividends paid last year after ADM’s interest surfaced, shareholders able to take maximum advantage of the franking credits will end up receiving more than $14 a share of value.

While there may be some disappointment that Graincorp will, like AWB, ABB and CSR’s sugar business (snapped up by Agrium, the Glencore-owned Viterra and Wilmar International respectively) now be owned offshore, the global consolidation of the industry among a handful of industry heavyweights made it almost inevitable that it, too, would be consolidated into one of the multi-nationals.