Archer-Daniels-Midland Co. (ADM)’s A$2.2 billion ($2 billion) takeover of GrainCorp Ltd. (GNC) was blocked by Australia, prompting a record drop in shares of the east coast’s biggest crop handler and a slide in the local currency.
“This proposal has attracted a high level of concern from stakeholders and the broader community,” Treasurer Joe Hockey said today, ruling U.S.-based ADM’s A$12.20 a share bid isn’t in the national interest. “Now is not the right time for a 100 percent foreign acquisition of this key Australian business.”
GrainCorp closed down 22 percent at A$8.72 in Sydney after the rejection, the first time a U.S. company has been blocked from buying Australian assets by the Treasurer, according to law firm Minter Ellison. ADM, which holds a 19.9 percent stake in GrainCorp, is likely to wait for a change in political climate that would allow it to take full control, said BBY Ltd.
“It’s a long-term game being in grain trading and making these strategic acquisitions,” said Dennis Hulme, a Sydney-based analyst at BBY who has a sell rating on the stock. GrainCorp may make further acquisitions, with Ridley Corp., a Melbourne-based maker of agricultural feedstock, a possible target, he said. The company dropped a A$415 million bid for Ridley in 2008.
ADM, the world’s largest corn processor, agreed to buy GrainCorp for A$12.20 a share in April and the stock traded about that level until the West Australian newspaper reported on Nov. 15 that Prime Minister Tony Abbott was inclined to veto the deal.
Australia’s dollar fell to a 2 1/2-month low of 90.56 U.S. cents as the decision raised concern about investment flows into the country. The currency subsequently recovered to 91.13 cents at 10:04 a.m. New York time.
ADM dropped 3 percent to $40.25 at the close of a shortened trading session today in New York. The Decatur, Illinois-based company is “disappointed” and is reviewing its “capital allocation,” Chairman and Chief Executive Officer Patricia Woertz said in a statement. The company won’t appeal the decision, Victoria Podesta, a spokeswoman, said in an e-mail. GrainCorp is “extremely disappointed” the transaction won’t proceed, Chairman Don Taylor said in a statement.
Under Woertz, ADM has joined a push by companies including Glencore Xstrata Plc and Hong Kong-based commodities trader Noble Group Ltd. to target agricultural assets, betting on rising demand from Asia. Buying GrainCorp would have been ADM’s biggest deal. The largest so far is its $470 million purchase of W.R. Grace & Co.’s cocoa business in 1996, according to data compiled by Bloomberg.
To encourage ADM and give it a platform to build stakeholder support, Hockey said he would likely approve any proposal by the company to raise its stake in GrainCorp to 24.9 percent. Sales at GrainCorp, which has benefited from growing Asian demand, have jumped since Australia’s 2006 decision to strip AWB Ltd. of its wheat export monopoly.
“He’s opening the door for us to move to a higher level and that is something we would consider,” ADM’s Podesta said in a phone interview. The company has a range of options on what to do with the money allocated for the takeover, she said, declining to elaborate. It had offered to sweeten the deal this week by spending an extra A$200 million on infrastructure, capping grain-handling charges and offering storage facilities to other grain marketers.
ADM could maintain its stake as the basis of a strategic business relationship, given its track record of keeping a holding in the world’s largest palm-oil trader, Wilmar International Ltd., said Belinda Moore, a Brisbane-based analyst at Morgans Ltd. GrainCorp has a good track record on its own acquisitions and can continue to build a large agri-business, she said.
GrainCorp has announced eight takeovers valued at $1.3 billion in total in the past 10 years, according to data compiled by Bloomberg. The largest was the $655 million purchase in 2009 of United Malt Holdings Ltd.
Ridley’s media office didn’t immediately reply to a message left at its head office seeking comment on whether it could be targeted by GrainCorp.
GrainCorp “will continue their strategy of adding logistics and primary processing capability like they’ve done with trains, hubs, malt and with oil crushing,” Paul Jensz, a Melbourne-based analyst at PAC Partners Pty, said by phone. “Now they need to do bolt-ons and push efficiency gains in and around those divisions.”
It’s the third-biggest rejection of a foreign company by Australia, said James Philips, head of mergers and acquisitions at Minter Ellison in Sydney. Royal Dutch Shell Plc had a A$6.5 billion bid for control of Woodside Petroleum Ltd. (WPL) blocked in 2001 and Singapore Exchange Ltd. (SGX)’s A$8.4 billion bid for ASX Ltd. was rejected in 2011.
“Of the 131 significant foreign investment applications we have dealt with, this is the only application we have prohibited,” Hockey said, adding the ruling didn’t signal Australia is closed to foreign investment.
Buying GrainCorp, the only major publicly traded grain merchant left in Australia after the country deregulated its wheat-export system, would have given ADM control of 280 storage sites and seven of the 10 ports that ship grain in bulk from the nation’s east coast.
“It’s a delicate balancing act between the foreign investment that clearly is required for Australian agriculture to grow and a decision about some key assets,” Matt Linnegar, CEO of the National Farmers’ Federation, said by phone from Canberra. “I don’t think it should be a signal to dissuade further foreign investment.”
Abbott declared the nation “open for business” after being elected in September. The GrainCorp decision is a victory for farm groups and country-based National Party members of the ruling coalition who campaigned against the bid.
“It’s an extraordinary decision and it shows that Abbott isn’t a political ideologue, he’s pragmatic,” said Nick Economou, a political analyst at Monash University in Melbourne. “He’s willing to receive criticism from the business sector and the financial press because farmers and the rural community are an important constituency.”
Australia’s control of its food security is at risk, Deputy Prime Minister Warren Truss said this month. Truss leads the Nationals, a party that draws support from rural voters and is part of a coalition elected in September.
“From a political perspective and a farmer’s perspective, it was probably the most likely outcome,” Evan Lucas, a market strategist at IG Ltd. in Melbourne, said by phone. “There was never going to be a price that ADM offered that would have been enough.”
The U.S. has contributed the most foreign investment into Australia each year since 2002 and Australia approved A$36.6 billion of deals involving U.S. investment in the 12 months to June 30, 2012, according to the most recent annual report published by the review board. A total of 13 of 11,420 applications made to the board were rejected in fiscal 2012, all related to real estate deals, it said.
Mining magnate and first-time lawmaker Clive Palmer planned to introduce a bill Dec. 9 opposing the deal. This month, he called GrainCorp “a great national institution” that shouldn’t be sold. A Senate committee inquiry’s interim report in August said ADM’s takeover could hurt competition.
There were no appropriate conditions that could have been imposed on the bid, Hockey said.
The rejection sends “a bad message,” said Saul Eslake, chief Australia economist at Bank of America Merrill Lynch in Melbourne. “One, it says that Australia isn’t quite as open for business as the prime minister indicated on election night. And secondly, it says that the National Party is going to exert a more significant, and I would say as a matter of personal opinion, more malign, influence on this government than their numbers in the parliament would suggest.”