GrainCorp

Commodities broker Archer Daniels Midland (ADM) has made a takeover offer for grain handling business GrainCorp. ADM has offered $13.20 per share, comprising $12.20 in cash and $1 as a fully franked dividend, valuing GrainCorp at $3bn. Despite GrainCorp’s board recommending the bid, it isn't a done deal.

Three things could yet chaff: regulatory approval is needed from several agencies, 50.1% of shareholders need to approve the bid and an independent expert must find the deal fair and reasonable. The last point is a near certainty and, with ADM already holding almost 20% of the stock pre-bid and winning management’s endorsement, the bid is likely to cross the acceptance threshold. The risk lies with the regulators.

The Foreign Investment Review Board (FIRB), ACCC and China’s Ministry of Commerce (known as MOFCOM) must all approve the deal and there are several points of contention.

GrainCorp dominates grain handling and export infrastructure, controlling seven of the eight export terminals along the east coast as well as rail and storage facilities. ADM has a 16% stake in the remaining export terminal.

Such facilities have traditionally operated under an open access regime but farmers are concerned they could be denied use or made to pay more. In the US, for example, such facilities are typically closed to third parties. Acknowledging these concerns, the ACCC has declared a public enquiry into the bid.

GrainCorp’s dominance will also perk the interest of FIRB, particularly in an election year. The Treasurer has discretion regarding approvals and the thought of vital, strategic assets falling into foreign, non-grower hands could provoke populist instincts. FIRB has denied several foreign takeovers in the past, including Shell’s takeover of Woodside Petroleum and a Chinese miner’s takeover of the Prominent Hill gold/copper mine.

With the shares trading at a small discount to the bid price and franked dividends to come, a small gain could be made with a successful bid. An unsuccessful bid will, however, likely mean a sharply lower share price.

Although GrainCorp operates strategic assets, it has made contentious acquisitions and is hardly an exemplary generator of profit. The deal offered by ADM appears to be a good one and, with a risk it could fall over, we recommend taking advantage of it. SELL.