Archer-Daniels-Midland Co.’s (ADM) failure to win Australian approval to buy GrainCorp Ltd. (GNC) opens the door for share buybacks, bigger dividends or other acquisitions as the company reviews how to use about $3.5 billion in cash.
The world’s largest corn processor will consider ways to boost shareholder returns as well as investing in organic growth or takeovers, Victoria Podesta, a spokeswoman for the Decatur, Illinois-based company, said in a phone interview yesterday. ADM held $3.5 billion in cash and short-term assets as of Sept. 30, according to data compiled by Bloomberg.
Australia’s rejection of ADM’s A$2.2 billion ($2 billion) takeover of Sydney-based GrainCorp yesterday was the first time a U.S. company has been blocked from buying assets in that country. Treasurer Joe Hockey said now was not the right time for a foreign company to take full ownership of “this key Australian business.” GrainCorp is the biggest crop handler on Australia’s eastern coast.
The GrainCorp acquisition “was good to have but not critical to our future,” Podesta said. “Where we see good opportunities that fit our strategy and our expectations for value creation for shareholders, we would act on those opportunities.”
ADM, which holds a 19.85 percent stake in GrainCorp, in April agreed to buy the remaining stock for A$12.20 a share. Sales at GrainCorp, which has benefited from increasing Asian demand, have jumped since Australia’s 2006 decision to strip AWB Ltd. of its wheat export monopoly. Hockey left open the option for ADM to increase its stake to 24.9 percent.
It was a “surprising decision,” Ken Zaslow, a New York-based analyst for BMO Capital Markets, said of the Australian ruling in a report yesterday. ADM may maintain its position in GrainCorp, increase its stake for a potential future takeover bid or forge a partnership and sell its interest, he wrote.
The company doesn’t plan to appeal the decision and is considering whether to increase its stake in GrainCorp, Podesta said. She declined to comment on whether ADM would consider another bid to acquire the Australian company.
ADM has repurchased about 2.8 million shares worth an estimated $100 million this year, Chief Financial Officer Ray Young said on an Oct. 29 earnings call. It needs to buy back 11 million more shares to offset the impact of an equity unit conversion in 2011, he said.
The company has raised its dividend for the past 12 years and historically had a dividend payout ratio of as much as 25 percent of earnings, Young said during a Nov. 13 presentation. The company is expected to boost the quarterly dividend to 20 cents next year from 19 cents, according to Bloomberg dividend projections.
A strategic acquisition with a high return on invested capital should rank above dividends and share repurchases, said Marian L. Kessler, a Portland, Oregon-based portfolio manager for Becker Capital Management Inc., which holds 989,516 ADM shares.
“That’s how you grow your business,” Kessler said in a phone interview yesterday. “They have been buying global assets and will continue that model.”
The company had pursued GrainCorp to increase its sources of crops and to meet growing Asian demand. 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 ports that ship grain in bulk from the nation’s east coast.
GrainCorp declined 22 percent to A$8.72 in Sydney yesterday. ADM fell 3 percent to $40.25 at the close in New York. The company may provide more details on its future plans when it releases fourth-quarter earnings, Podesta said. “We have a pipeline of good opportunities.”
Earnings for ADM are expected to rise to $3.23 a share next year, excluding one-time items, according to the average of 13 analysts’ estimates compiled by Bloomberg.
“The ample grain harvest and strong ethanol margins, along with share repurchases will likely allow ADM to meet and possibly exceed our $3.55 earnings-per-share estimate in 2014 without GrainCorp,” Farha Aslam, a New York-based analyst for Stephens Inc. who recommends buying ADM shares, said in a report.
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