Australia’s GrainCorp rejects another ADM offer

GrainCorp Ltd. on Thursday rejected a sweetened $2.9 billion bid from Archer Daniels Midland (ADM), putting pressure on the U.S. agribusiness giant to boost its offer for Australia’s last major independent grains handler.

ADM was likely to lift its A$12.20 bid, as it targets the purchase to give it a doorway to supply fast-growing Asia nations seeking food security, analysts said, while cautioning that a significant hike was unlikely.

"They might tinker with it on the margins but it’s probably not going to be significantly higher," said Min Tang-Varner, an analyst who covers ADM for Morningstar in Chicago.

Grains, food and agricultural businesses in Australia, the world’s second-largest wheat exporter and an attractive market due to stable policies and good links to Asia, have been snapped up by large global players in recent years.

GrainCorp said the ADM offer — increased last month by 3.8 per cent from the original A$11.75 per share bid, a 40 per cent premium to the share price at the time of that first approach in October — continued to materially undervalue the company.

ADM, which has built up a 19.9 per cent stake in GrainCorp, said its revised proposal represented fair value and would consider all its options.

A source close to the talks, who was not authorized to speak publicly, said lines of communication between the two sides remained open.

Analysts have previously told Reuters the revised bid was still below the average acquisition multiple for Australian and global agribusinesses based on forward earnings.

"ADM will be very cautious about the price it is prepared to pay," said Dennis Hulme, a senior analyst at BBY Ltd. in Sydney.

"They’ll most likely increase the total value of the bid to A$12.50 to A$12.60, including the value of franking credits, restructuring the offer to include a special dividend of around 80 Australian cents," Hulme added.

GrainCorp operates seven of the eight bulk grain elevators in eastern Australia, handling as much as 60 per cent of the region’s wheat, barley, canola, chickpea and sorghum crops.

The company took in 12.2 million tonnes of grain last season, when a bumper harvest delivered a record annual net profit.

But GrainCorp’s earnings are forecast to slide as Australia’s grains harvest retreats from record levels due to dry weather in key growing areas.

Go hostile?

So far ADM’s move has failed to flush out another bidder, which could drive the offer price higher.

Rumoured potential rival bidders include Cargill, Louis Dreyfus, Singapore’s Wilmar International, China’s Bright Food Group and COFCO.

ADM could also decide to take the gloves off in the battle.

"It would suit ADM to go hostile very well, even short of 50 per cent, and when the next drought rolls around, they snap up the balance at a cheaper price," Hulme said.

Morningstar’s Tang-Varner said ADM needed to be careful it did not risk its access to short-term funding by damaging its credit ratings with an offer.

Moody’s Investors Service earlier this month lowered its outlook for ADM to negative from stable after it raised its bid. The rating firm said it would place ADM’s ratings under review for a downgrade if ADM reached an agreement on a purchase price for GrainCorp or pursues a hostile acquisition.

"They just have to be very conscious of the credit rating that they have," Tang-Varner said. "I don’t think they would like to impair that for the sake of getting a new asset."

– Jane Wardell, Reuters’ deputy bureau chief for Australia and New Zealand, writes from Sydney.