Future of Australian M&A left in question

February 2014  |  FEATURE  |  MERGERS & ACQUISITIONS

Financier Worldwide Magazine

Australia’s status as a welcoming environment for mergers and acquisitions was left in question in December after the country’s treasurer Joe Hockey refused to sanction the $2.6bn takeover of GrainCorp Limited by US agri-business giant Archer Daniels Midland Company (ADM). Mr Hockey’s decision came following the Foreign Investment Review Board’s (FIRB) failure to reach a consensus recommendation on the merger.

In blocking the takeover Mr Hockey noted that “this proposal has attracted a high level of concern from stakeholders and the broader community.” The deal, according to the treasurer, is not in the national interest. “Now is not the right time for a 100 percent foreign acquisition of this key Australian business,” he added. Critics of the failed bid for GrainCorp, including domestic grain growers, believed that allowing a foreign company such as ADM to acquire GrainCorp, a company which accounts for one-third of Australia’s wheat production, would reduce competition and adversely affect their business.

Following the announcement the US State Department went on record expressing its dissatisfaction at the decision. “We are disappointed by the government of Australia’s decision to reject Archer Daniels Midland’s proposed acquisition of GrainCorp,” a State Department spokeswoman said. “The United States is the largest foreign direct investor in Australia, with $132bn in investment projects to date, and we look forward to working closely with Australia’s government to build stronger trade and investment ties.” The American Chamber of Commerce also noted that it is extremely concerned about the signals the ADM decision will send to other potential foreign investors.

The decision to block the merger came just 12 weeks after new Australian Prime Minister Tony Abbott insisted that Australia is “open for business”. The treasurer’s decision came in for fierce criticism from a number of quarters, especially in light of the prime minister’s assertion. Business groups, economists, trade specialists and political opponents have all registered their disapproval, claiming that the refusal to allow the deal sends the wrong message to investors about Australia’s openness to investment.

Moreover, it would appear that going forward prospective investors in Australia will be required to factor in a level of political risk when they consider acquiring a stake in an Australian business. The deal had previously been approved by the Australian competition regulator and was widely expected to meet the approval of the FIRB and the government.

The impact of the block may well be felt most sharply in the agri-business sector. In a statement, GrainCorp’s chairman Don Taylor said that the group was extremely disappointing that the transaction would not be moving forward as planned. “Today’s events will have enduring implications that will be felt not only by our shareholders but by the entire industry. Australian agriculture has been prevented from realising the potential benefits from the significant capital ADM would have invested in the long term future of the industry,” he said.

Potentially compounding the fears of foreign investors, in December the government also announced that it was exploring the possibility of providing taxpayer support to national air carrier Qantas Airways Ltd. The government had been considering the possibility of lifting the restrictions on foreign ownership of Qantas in order to put the group on a level playing field with Virgin Australia Holdings Ltd; currently, foreign ownership is limited to 49 percent of Qantas, with single foreign investors limited to just a 25 percent stake. A government buyback of up to 10 percent of Qantas has also been floated as an option for the company.

Despite the government’s protestations that the country is still open for business, with the caveat that that ‘business’ should be in the national interest, the decision to block the ADM/GrainCorp deal and the potential re-nationalisation of the Qantas group will undoubtedly have a negative effect on foreign investor confidence within Australia. In order to allay investor fears, the government may have to set out the details of the competitive issues that it was so concerned about and how this relates to the national interest. By clarifying the issues that dissuaded it from consenting to the completion of the deal, the government can make it clearer to potential investors what the unique circumstances of this case are, and alleviate any concerns they might have about pursuing a deal in Australia.

Rejection of the ADM deal has subsequently placed two other bids by foreign companies firmly in the spotlight. Although each transaction in front of the FRIB will be treated on its own merits, there is now an air of contention surrounding any foreign takeover of an Australian asset. The board is currently reviewing bids from Chinese firms, one of which is the parent company of Chinese state owned Yanzhou Coal Mining Company looking to buy out minority investor interests. The second deal before the review panel is the bid from the State Grid Corporation of China, which is attempting to acquire a large part of the Singapore Power equity held in its Australian electricity and gas businesses. At the time of writing, these two deals are still in front of the FIRB awaiting a decision. The direction in which Australian FDI heads in the future may depend heavily on these next two reviews.

© Financier Worldwide

BY

Richard Summerfield