Play day for GrainCorp

GrainCorp's recent stellar performance as well as its strategic value means that ADM may soon have a contest on its hands, now that the grain handler is firmly in play.

It probably was only a matter of time before the rapid global consolidation of the agricultural commodities sector resulted in a bid for the last of the big remaining locally-listed grains handling businesses. It looks like GrainCorp is about to be consolidated.

The plunge onto GrainCorp’s register this morning by US agribusiness giant Archer Daniel Midlands, at a 33 per cent premium to the price at which GrainCorp shares had been trading, may be the precursor to something quite interesting, given both GrainCorp’s stellar recent performance, its strategic value and the scarcity of remaining large-scale agricultural commodity businesses. A contest can’t be ruled out, now that GrainCorp is firmly in play.

GrainCorp is the last of the trio of big grain handlers that were listed on the ASX. AWB was acquired by Canada’s Agrium in 2010 and ABB, within weeks of announcing a merger with GrainCorp, was acquired by another Canadian, Viterra. Viterra was itself acquired by Glencore in a $US5 billion deal earlier this year. Archer Daniel is said to have had an interest in
acquiring Viterra itself.

The backdrop to the global large-scale corporate manoeuvring is the anticipated boom in soft commodities as China’s middle class, and indeed Asia’s economies more broadly, continue to shift up the development curve.

GrainCorp’s Alison Watkins, in a KGB interview earlier this year, referred to the expectation that the population in the region would grow by about a third over the next 30 years; that grain consumption would increase 50 per cent and that the volume of Australian traded grain would soar by 100 per cent, or about 150 million tonnes a year.

As she said, that puts the Australian agricultural sector, and GrainCorp, in the right place at the right time.

It will, of course, require considerable amounts of capital and continuing improvement in the efficiency of agricultural production and its supply chain to take advantage of that outlook, potential obstacles to the full exploitation of the opportunities for the sector identified in a report commissioned by ANZ Bank this week.

The global agribusiness giants see that same opportunity, have the capital to take advantage of it and are racing to increase their exposures to Asia as well as to diversify their sourcing and product portfolios. Australia’s strengths in agriculture and proximity to the region explain why the local players have been gobbled up.

GrainCorp, with its ports and storage facilities, dominates the east coast grain handling sector. Its 2007 acquisition of United Malt Holdings also made it one of the world’s largest commercial malt producers and this year’s simultaneous $472 million acquisitions of the Gardner Smith group and Goodman Fielder’s commercial oils business gave it an immediate leading position in edible oils and added to the extent to which its grains handling and its processing businesses have been increasingly integrating.

The fact that it has been performing strongly (it has given guidance that this year’s earnings should be at the upper end of a range of $185 million to $205 million, compared with the $171.6 million earned last financial year) and that it is the largest of the big listed entities in the sector will make a play for it expensive.

GrainCorp said today that Archer Daniel had informed it of its acquisition of the shareholding today and that it wished to engage in discussions concerning a potential transaction, but had not put forward any formal proposal yet. Should it receive a proposal from Archer Daniel, the board would review it as well as other options to maximise value for shareholders, it said.

The price Archer Daniel paid to acquire 10 per cent of GrainCorp this morning -- $11.75 a share compared with the $8.85 a share at which the shares had closed yesterday – is an indication of what could eventuate if a formal contest for control of GrainCorp were to eventuate.

At that price GrainCorp is valued at $2.7 billion but, if GrainCorp were to initiate an auction among the global giants of the grain trading sector the price-tag for success could ratchet up very quickly, and sizeably. The company is a globally significant and strategic asset in one of the more prospective segments of global commercial activity longterm.


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