ADM pursues Graincorp acquisition

January 2013 | DEALFRONT | MERGERS & ACQUISITIONS

Financier Worldwide Magazine

GrainCorp Limited, the largest grain handler in Eastern Australia, announced on 15 November that it had “comfortably” rejected an unsolicited takeover bid of $2.8bn from US food giant Archer Daniels Midland Company (ADM). In light of this rejection, ADM submitted an improved second offer for the company on 3 December, reflecting a 3.8 percent increase, to A$12.20 per share in cash. Accordingly, the improved offer values GrainCorp at $2.9bn. At the time of writing, this offer is still under consideration, although it is understood that GrainCorp’s board are unlikely to recommend it to shareholders.

In a statement, GrainCorp confirmed that the first offer, which would have seen ADM pay A$11.75 per share, materially undervalued the company. GrainCorp’s chief executive officer Alison Watkins noted that the company is currently pursuing a growth strategy and is, therefore, “not in a selling ourselves mode”. GrainCorp is keeping “an eye out for more bolt-on acquisitions” Ms Watkins added.

The decision by GrainCorp’s board to reject ADM’s advances is borne out of “outstanding” annual results and “compelling” prospects for future earnings. The company registered a 19 percent leap in profits to $205m for 2011-12, as well as issuing a 35 cent half year share dividend – higher than analysts had predicted. GrainCorp also expects to boost earnings for its malt and oilseed processing divisions to $45m by 2014.

Regarding the company’s plans for future development, Sydney-based GrainCorp says that is has a “strong outlook and clear strategy including growth, asset optimisation and cost initiatives to deliver incremental underlying EBITA of approximately $110m over the next four years”.

GrainCorp is Australia’s largest agribusiness, supplying 35 percent of the country’s malt, 40 percent of its canola and refined edible oil, as well as 35 percent of its flour. The company also owns seven of the eight bulk grain storage sites in Eastern Australia. The grain storage stratum of the company’s business contributed $250m in EBITDA in the financial year 2011-12. Ms Watkins noted that “our storage and logistics network is still the jewel in our crown”.

Although ADM’s offer for GrainCorp was dismissed, Ms Watkins noted that the company’s board “would naturally respond to any proposals that are in shareholders’ interests”; accordingly, the company’s statement confirmed that GrainCorp “remains committed to maximising value for shareholders”.

ADM’s improved second offer is 80 cents per share more than the original proposal, including the half year share dividend announced by GrainCorp in November. By allowing shareholders to keep the announced dividend, the price per share is actually 6.8 percent higher than the original offer. Shares in GrainCorp rose 3.2 percent following the second offer, however, since it is a modest increase, ADM may be forced to raise its bid going forward.

ADM is the world’s largest corn producer, as well as a food processing and commodities trading company. It currently operates over 270 plants worldwide and was hoping to take advantage of GrainCorp’s significant standing in the Australian grain handling and processing market as well as its other operations worldwide.

The A$11.75 offer put forth by ADM on 19 October was 33 percent higher than Graincorp’s closing price on the Australian Securities Exchange (ASX) the day before. The second bid was 40 percent higher than GrainCorp’s pre-bid share price. ADM’s spokesperson Jackie Anderson said “we approached GrainCorp’s board with a proposal that represented a significant premium to the prevailing GrainCorp share price at the time of our approach. We believe it remains an attractive proposal.” ADM declared that through the proposed takeover, GrainCorp would be “better positioned to connect Australia's farmers with growing global demand for crops and food, particularly in Asia and the Middle East”.

In response to GrainCorp’s assertions that the company is better positioned to continue operating independently, ADM chairman and chief executive officer Patricia Woertz said of the second offer “our proposal also offers more certainty, greater value and immediate realisation of potential future value for GrainCorp shareholders than GrainCorp’s stand-alone plan.”

ADM was already a stakeholder in GrainCorp and in October upped its stake from 4.9 to 14.9 percent in order to facilitate the proposed takeover. Prior to the announcement of the second bid, ADM increased its stake in the company to 19.9 percent. This move may deter other potential suitors from pursuing GrainCorp.

GrainCorp’s decision to rebuff ADM’s advances is largely predicated on potential future earnings, particularly with reference to its seven wheat export terminals and the volume of wheat that is processed through them. Smaller harvests could negatively impact upon the company’s future share price. The US department of agriculture has projected a smaller yield of crops in Australia for the 2012-13 season, reducing the harvest some 30 percent to 21 million tonnes of wheat, down from 29.5 million tonnes in 2011-12.

Barclays Plc and Citigroup Plc advised ADM on the deal, Credit Suisse and Greenhill & Co acted for GrainCorp.

Richard Summerfield