Selling GrainCorp into a sweeter bid

GrainCorp (GNC)

There was finally a good result on GrainCorp last week, with the news that US grains giant Archer Daniels Midland has won the right to look over GrainCorp’s books after launching a sweetened deal that will see shareholders pocket $13.20.

The new deal comprises ADM’s original $12.20-a-share offer plus dividends worth $1-a-share that ADM has agreed to allow GrainCorp to pay its shareholders. The dividends will be fully franked, providing up to 43 cents of franking credits for those who can capture the full benefit of franking. One of the interesting parts of the deal is that if it’s delayed beyond October, shareholders get another 3.5 cents for every month of delay, which is about 3% annualised. This is partly the reason the stock is trading so high.

Personally, at $12.80, I think it’s a sell, especially for those who can’t make full use of the franking credits. If, on the other hand, you can get the full benefit of the franking credits and you’ve got nothing else to do with the cash, then by all means hang on. But I’d be inclined to look for other opportunities in the market. Remember, there’s still some uncertainty over the deal. GrainCorp needs approval from the Chinese government before it can go ahead, which is in no way guaranteed.

For those considering selling now, at $12.80, shareholders will only be selling at a cash discount of about 3%, which really when you look at it, is not bad given that the deal could take another 5-6 months to complete, and the uncertainty over approval from China.

Alternatives to GrainCorp

For those looking to invest in other big agricultural stocks following the GrainCorp news, options are becoming pretty limited. Ridley Corporation is one we’re looking at, although it recently came out with a profit downgrade. Others that might be worth a look include Warrnambool Cheese & Butter, although it’s quite illiquid and I have concerns over what impact the milk price wars could have on producers in the future, and the Australian Agricultural Company (AACo), although at times it hasn’t been particularly good as a cash generator. Elders could also be an option, but it’s sort of in run-off mode at the moment.

Billabong (BBG)

Billabong is really just in limbo at the moment. The share price is currently trading at about 48 cents, the bid from Paul Naude and Sycamore Partners is 60 cents, but Billabong has extended talks with its suitor for another 10 days. I think a deal will be done, but I’m not prepared to put money into it at the moment. In my view, the downside is too substantial if no deal is done.

Billabong has a history of getting to a point with deals and then they fall over. I think if this deal falls through, the stock could drop to 15-20 cents.  So you’ve got 12 cents of upside, 20 cents of downside, and while my instinct tells me this one will get done, I just don’t think it’s worth the risk.  And if this deal fails, Billabong will surely need to raise another big chunk of money to repair its balance sheet.  Who knows what price that would be at?  So, I am putting Billabong in the too-hard basket. It’s just too risky for me.

Woodside Petroleum (WPL)

Woodside has been one of our targets for a long time, but its decision to delay its LNG expansion plans and become an income stock really changes the nature of the company.  In fact, we’ve actually moved it to an income portfolio.  In the short term, Woodside being a yield stock is great for investors, but in the long term I think it will start to lose its strategic appeal as a takeover target.

Essentially, if Woodside is saying there is no point in pushing ahead with the expansion of its assets in Australia for the timebeing, does it still have its strategic appeal that it once did?  My feeling is probably not.  For investors purely chasing yield, Woodside is a good option, it’s paying out over 5%, but for those who bought in for its takeover appeal, I would be inclined to take some profits now.

Discovery Metals (DML)

There’s been a rumour floating around that Cathay Fortune may come back with another bid for Discovery Metals. I think this might actually happen, but with the share price now sitting at about 40 cents, any takeover offer will surely be much lower than the $1.70 originally put forward.

The share price is probably close to bottoming out now, but if Discovery goes ahead with a capital raising, the share price could take another hit because quite often investors will sell the shares they hold to take up the cheaper shares in the raising. Even though most of the damage to the share price has probably already been done, for me it’s just too much of a speculative buy. I would be inclined to wait to see what Cathay comes back with.

Portfolio moves

In terms of our portfolio, with the money we have taken off the table with GrainCorp, we are increasing our holdings in Insurance Australia Group, QUB Logistics, and Envestra.

IAG is probably trading around book value, but it doesn’t have a takeover premium built into it, so while the insurance industry obviously has its ups and downs, this one’s hasn’t got a strategic premium already built into it.

Readers of the column will know I’ve previously recommended Envestra as a buy for a number of reasons (see Fund action won’t ground airport deal). For those looking to take a position, I would recommend they do it via the Shareholder Purchase Plan (SPP) at 99 cents as opposed to the share price, which is currently around $1.07. Investors can subscribe up to $15,000 on the SPP, and for smaller investors I think that’s an excellent deal.

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