GrainCorp (GNC.AX) – Merger Arbitrage – 15%+ Upside

Current Price – A$9.01

Acquisition Price – A$10.42

Upside – 15%

Expiration Date – TBD (expected in 2019)

Acquisition Offer

This idea was shared by Dan.

 

One of the main players in Australia’s agriculture business has received A$10.42/share offer from freshly founded private equity company Long-Term Asset Partners (LTAP). The offer is non-binding, but has already reached the due diligence phase and based on the latest announcement merger talks are progressing well.  The buyer has a seemingly credible management team and was able to secure A$3.2bn funding from Goldman Sachs.

Large spread likely reflects market’s skepticism created 5 years ago when US agribusiness giant Archer Daniels Midland has tried to acquire Graincorp and even raised their offer a few times, but eventually got halted by the government. I think this time it will be different as the concerns that were present 5 years ago are no longer in the picture and the key group of grain growers (who opposed the previous deal) are favoring the current offer.

Downside to unaffected price is only 20%, so risk reward ratio looks appealing.

Timing is so far uncertain, but board is expected to issue recommendation by Feb 2019.

 

GrainCorp

Graincorp operates grain storage and logistics assets - it is the largest grain handler in Eastern Australia with the biggest storage and transport network. On top of that it also operates in malting (top 5 global producer) and oil (Australia’s largest integrated edible oil company) businesses. Because of the droughts this year GrainCorp in facing near term headwinds that already started affecting it's financial performance - according to CEO: "The 2019 financial year will be extremely challenging for GrainCorp with expectations of a substantially smaller (East Coast) crop due to the current drought". In light of these headwinds company is carrying out 'Portfolio Review' process and is including the current acquisition offer as one of the potential strategies going forward. Board is expected to provide update on the review at or before Annual General Meeting, which is scheduled for the 20th of February 2019.

 

Long-Term Asset Partners

LTAP is a freshly minted asset manager for a trust whose beneficiaries are Australian investors. Team has strong backgrounds - Tony Shepherd (chairman) has served as a chairman in two other billion dollar companies, Lance Hockridge (deputy chairman) has been Aurizon’s (A$9bn rail freight company) CEO and Andrea Staines served in Aurizon as a non-executive director. Reportedly, LTAP has also hired a previous Graincorp GM and Archer Daniels Midland’s executive Nigel Hart. So the team definitely looks competent and it explains how they’ve managed to attract this much money for funding from top level source.

GrainCorp is their first acquisition - so it is kind of name defining, especially keeping in mind the publicity it has attracted. This should at least to some extent serve as an incentive to bring the deal to the closure even if shareholders/board push for an improved offer. If LTAP simply walks away from their non-binding' offer, their credibility will be damaged and next time getting companies to talk and getting funding for the deals might prove more difficult.

 

Previous Offer

5 years ago GrainCorp has received an offer from US agribusiness giant Archer Daniels Midland (initially at A$11.75/share and later increased to A$13.2/share). Timing was supposedly good, as the new Liberal party’s governments has vowed to open up and promote foreign investments. Nonetheless, surprisingly transaction was rejected by the government as according to the treasurer this acquisition was not in the best interest of the nation. The main comment made was: ‘‘Allowing it to proceed could risk undermining public support for the foreign investment regime and ongoing foreign investment more generally’’. This decision has received lots of criticism as many considered that decisions to block/allow foreign investments should not be based on popularity and public attitude. Competition concerns were also mentioned even-though ACCC (Australian Competition and Consumer Commission) has made their review and decided to not to oppose this deal.

So overall, I think this was purely a populist political decision not driven by any economic factors. Liberal party in Australia is in a coalition with the Nationals, while liberals' vote base is elitist business people, the Nationals' base are rural farmers, who were apparently anxious about the idea of foreigners owning the main grain infrastructure assets. So despite their coalition partner’s open view on foreign investments, Nationals have pressured FIRB to reject the decision to appeal to the rural farmers.

 

Current situation

LTAP's offer to acquire GrainCorp is unlikely to attract as much opposition for a number of reasons:

  • There should not be any antitrust concerns as LTAP so far does not own any assets and pledged not to sell any of GrainCorp's assets if the acquisition gets completed.
  • Asset ownership by foreigners is also no longer a valid argument as LTAP manages funds on behalf of Australian investors.
  • GPA group (Grain Producers Australia) - which should more or less reflect growers opinion - are supportive of the acquisition. According to them, combined entity will better cope with the volatility of the industry - with the grim forecasts for 2019 it sure looks like Graincorp might require some capital injection.
  • Another positive point - reportedly LTAP has talked with two top Graincorp’s shareholders and it seems like the results were positive as the deal has reached a due diligence phase.

However, with only 6 months are left until elections in Australia, the risk remains that one party or another will use this deal to advance their political agenda and garner votes - Nationals might be especially interested in 'protecting' the grain growers gain.

 

Offer Might Be Increased

Archer’s initial bid of A$11.75 was rejected by Graincorp and was accepted only after they raised it to A$12.2 + A$1 of special dividend. In the 19th Dec update GrainCorp kind of hinted that it expects LTAP to make a better offer by calling the current one as 'not sufficiently certain', suggesting that LTAP is only one the options being considered and that the Board will consider 'merits of any final LTAP proposal' (maybe I am reading too much into simple press release). GPA also mentioned that the current price is most likely not enough and something closer to Archer’s offer might be needed.

Thus if the due diligence process proceeds smoothly without any large surprises I would expect LTAP to be willing to raise their offer if board/shareholders consider the current one to be insufficient.

 

Note: a number of links in the article are behind paywall, however by googling the respective headline you should be able to access them.

11 COMMENTS

  1. work 22

    thanks Dan, good article and idea. What do you think about the price? I wonder if the Board might not accept 10.42 AUD, especially given the complex and arguably risky financing? I have traded around it some, and am considering getting long again, but just concerned.
    The theory behind the deal is quite fascinating- using Allianz to insure against the ups and downs of annual harvests. Could be a great idea, or something a stodgy Board of Directors doubts, i don’t know. Anyway, going to keep on it… thanks

    1. DanX

      As I mentioned in the write-up, I believe A$10.42 is a starting negotiation price and I am quite sure the board will not accept it. However, I doubt they will reject the offer outright, but probably will require more details on safeguards and how debt laden financing structure will be maintained through cyclical lows..

      I do not have many details on Allianz involvement, just the rumors that they are part of LTAP’s offer. So if you have any further info to add, it would be appreciated.

  2. dt

    Below am sharing some more information I gathered while researching GrainCorp.

    It’s not clear if the quoted Australian investors are already in place or only will be found later:

    A source close to the bidding camp dismissed concerns over transparency saying additional investors would be brought on at a later stage.
    “LTAP would act as the manager for the purchase, initially supported by a $3.2 billion loan from Goldman Sachs, as well as $400 million from investment fund Westbourne Capital, before it would take on additional investors,” they said.

    https://www.smh.com.au/business/companies/graincorp-receives-2-4b-takeover-from-australian-consortium-20181203-p50jtj.html

    Government and other institutions require more transparency on the bid:

    NSW National Deputy Leader and Minister for Primary Industry, Niall Blair, said: “Whoever is behind the bid needs to know, this isn’t just a company, it’s an institution.”
    Farming groups say they could support the sale of Graincorp if it leads to more investment in rural communities but are wary over a lack of information on who is behind the bid.

    https://www.smh.com.au/business/companies/farmers-can-t-be-kept-in-dark-over-graincorp-bid-says-deputy-pm-20181204-p50k4i.html

    Activist investor offer asset sale as alternative to company sale:

    Under the Wylie plan, they’d sell the grains assets to a trade buyer or demerge them, leaving the malt and bulk liquid terminals operations as the continuing operations.
    Wylie has told the Graincorp board that he believes the combination would give shareholders the equivalent of about $10 a share – but leave the control premium for the world-class malt business and the liquid terminals business intact and available.

    https://www.smh.com.au/business/companies/the-friendly-activist-wylie-offers-graincorp-a-very-different-counter-bid-20181206-p50knk.html

    On highly leveraged deal LTAP deal structure with insurance contracts

    https://navva.org/singapore/singapore/german-giant-allianz-in-the-heart-of-graincorp-offers/

    1. work 22

      thanks dt for that update, wasn’t necessarily on the other major news wires. The more partners the better!

  3. Ilja

    A little bit of recent news.

    Graincorp had an annual shareholders meeting on the 20th of February and it seems that management’s inability to deal with LTAP’s offer and lack of progress on strategic decisions has resulted in shareholders’ dissatisfaction as quite high number of votes went against the director re-election and remuneration proposal. One of the largest holders Perpetual has commented: “We are disappointed with the board’s response over an extended period of time, around unlocking value in GrainCorp.”.

    https://www.asx.com.au/asxpdf/20190220/pdf/442sd3z3z5mlbz.pdf

    Now it appears that two largest holders in the company – Perpetual (12.9%) and Ellerson (16.7%) – are supporting LTAP’s offer and are pushing the board to further engage with it.

    Overall it seems that GNC has three options now: to go with LTAP’s offer, to divest parts of the business (management commented that they’ve received such offers) or to engage into restructuring recommended by Tanara Capital. With regards to LTAP, GNC chairman’s comments do not seem very encouraging so far as he called the offer: “slightly a black box”, “an unusual, unorthodox proposal with some very non-standard financing” and a “highly leveraged proposal” and also stated that “we’re not going to consider selling other than at very acceptable terms; we’ve yet to have any definitive terms presented to us,”. However I believe that the increasing pressure from shareholders should enliven the management and they should come up with something shortly.

    https://www.afr.com/business/agriculture/graincorp-keeps-it-broad-in-talks-with-number-of-parties-20190219-h1bfmd – shareholder comments

    https://www.afr.com/brand/chanticleer/john-wylie-goes-from-investment-banker-to-friendly-activist-20181205-h18s9n – Tanara’s proposal

  4. value_investor

    @DT @LLJA and other members,

    Could you, if possible, let us know your thoughts on the potential valuation of the two companies post spinoff … “New Grain Corp” & “maltCO” … the reason I ask is to figure out if buying Grain Corp now could be a good deal even if the buyout falls through and the spinoff does happen, as mentioned, before end of CY2019.

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