GrainCorp at Lowest Valuation Seen Ripe for Plucking: Real M&A

GrainCorp at Lowest Valuation Seen Ripe for Plucking
The GrainCorp Ltd. grain terminal stands at Newcastle Port in Newcastle, Australia. Photographer: Jeremy Piper/Bloomberg

No middleman in the industrialized world is offering potential buyers a cheaper way to export wheat to Asia than Australia’s GrainCorp Ltd.

While Glencore International Plc’s purchase of Viterra Inc.’s grain assets in Australia and Canada this month helped spur an 11 percent jump in GrainCorp’s shares on takeover speculation, the Sydney-based wheat handler still traded yesterday at 10.7 times profit, according to data compiled by Bloomberg. That’s the lowest among agricultural product wholesalers valued at more than $500 million in developed economies. It’s also a 57 percent discount to Glencore’s bid of

24.9 times earnings for Viterra, the data show.

GrainCorp, which operates seven of the eight ports that ship grain in bulk from Australia’s east coast, has tripled its sales since the world’s second-largest wheat exporting nation began deregulating the industry in 2006, and is projected by analysts to report record profit this year. A takeover offer is “inevitable,” according to Citigroup Inc., and GrainCorp could lure a bid of A$2.2 billion ($2.3 billion), 23 percent more than yesterday’s close, RBS Morgans Ltd. said.

“GrainCorp is a strategic asset,” said Belinda Moore, a Brisbane-based analyst at RBS Morgans. “With Viterra going, and the agriculture sector continuing to consolidate, there are fewer and fewer agriculture companies. It’s the last significant company in Australia capable of being taken out.”

GrainCorp rose 0.6 percent to A$9.05 a share, its highest close since June 2008, after reaching a high of A$9.12 today.

Virtual Monopoly

“We’re just going to focus on running the business as well as we can,” GrainCorp Chief Executive Officer Alison Watkins said in an interview in Melbourne today. “I think it’s flattering that everyone thinks we’re so attractive.”

GrainCorp, which traces its roots to 1916 and the Grain Elevators Board of the New South Wales state agriculture department, handles as much as 60 percent of eastern Australia’s grain crop and has about 20 million metric tons of storage at more than 280 inland grain handling sites, according to the company.

Its revenue has surged since Australia’s 2006 decision to strip AWB Ltd. of an export monopoly, after an inquiry found it was among firms that made illegal payments to win contracts from the former Iraq regime of Saddam Hussein under the United Nations’ oil-for-food program.

With GrainCorp owning the silos where farmers dump their harvests, railroad cars that carry loads to east coast ports, and the elevators used to load ships, the deregulation gave the company a “virtual, natural monopoly” on the eastern seaboard, according to Justin Crosby, a policy director at the Sydney-based NSW Farmers’ Association, which represents 10,000 members, half of them grain growers.

‘Deliver Your Wheat’

In the five-year period ended in September 2006, revenue at GrainCorp rose 60 percent, according to data compiled by Bloomberg. In the five years since, sales have risen 242 percent to A$2.8 billion, the data show.

“There’s very little competition in New South Wales outside of GrainCorp,” Crosby said. “There is a great deal of market power held by GrainCorp with regards to where you can deliver your wheat.”

As of yesterday, GrainCorp had risen 11 percent since Viterra said on March 9 that it was approached by possible buyers. The closing price of A$9 a share yesterday valued the company at 10.7 times profit, making GrainCorp the cheapest of five agricultural products wholesalers worth more than $500 million in the U.S., Western Europe, and developed Asia, according to data compiled by Bloomberg. The companies fetch an average of 23.1 times earnings, and Glencore’s C$16.25 a share offer is 24.9 times Viterra’s earnings, the data show.

Billionaire Stakeholder

Less than a week after Viterra’s disclosure, Australian billionaire James Packer raised his stake in GrainCorp to 6.2 percent, becoming the company’s largest shareholder, according to stock exchange filings. Brian O’Sullivan, a director at Ellerston Capital Ltd., the fund that holds the stake, didn’t return calls seeking comment on the investment.

A buyer of GrainCorp would be drawn by many of the same factors that drove Glencore’s C$6.1 billion ($6.1 billion) offer for Regina, Saskatchewan-based Viterra, which was made with Canada’s Agrium Inc. and Richardson International Ltd., according to Citigroup analyst Tim Mitchell. Agrium will buy most of Viterra’s retail facilities in Canada and Australia and a stake in Canadian Fertilizer Ltd., while Richardson will purchase a stake in Viterra’s Canadian grain-handling assets as well as some other North American operations.

“What really attracted us to Viterra is the asset base, a superb set of assets, elevators, port facilities, processing plants in Australia and in Canada,” Chris Mahoney, Glencore’s director of agricultural products, said on a March 20 conference call about the deal.

Glencore, Gavilon

People familiar with the matter said this month that Glencore had also expressed an interest in closely held Gavilon Group LLC as the Omaha, Nebraska-based grain handler weighed a sale that could fetch as much as $5 billion. While Singapore-based Wilmar International Ltd. and Japan’s Mitsui & Co. also expressed an interest, Gavilon discouraged Cargill Inc. of Minneapolis and Decatur, Illinois-based Archer Daniels Midland Co. because of antitrust risk, the people said. Japan’s Marubeni Corp. may also be interested, Reuters reported March 21.

Glencore forecasts annual global demand growth for grains and oilseeds of as much as 3.5 percent to be driven by Asia, Mahoney said on the call. Indonesia, where demand for wheat has risen more than 50 percent in the past decade, has surpassed Japan as Asia’s largest importer of the grain, according to the U.S. Department of Agriculture.

‘Luxury Foods’

Forecasting global wheat exports will double to more than 225 million metric tons by 2050, GrainCorp said demand will come from established markets in Asia, the Middle East and North Africa which already import half their grain, as well as new demand from sub-Saharan Africa and the Asian subcontinent, according to a March 28 filing to Australia’s stock exchange.

The growth will come in large part because of demand for protein from increasingly rich consumers, said David Leyonhjelm, director of Baron Strategic Services, a Sydney-based agricultural consultancy.

“As incomes rise, dietary preferences head toward what are perceived to be luxury foods, and that’s animal products,” he said. “Grain is a key feedstock ingredient. Even if it’s not being used to make bread and pasta, it will be used to make stock feed.”

Australia was the world’s second-biggest wheat exporter in 2011, according to the USDA, and GrainCorp earnings may rise to a record A$185 million in the year ending September, according to the March 28 filing.

‘Critical Mass’

With Viterra sold, AWB acquired by Agrium in 2010, and another large rival, CBH Group, owned by a co-operative of 4,500 farmers in Western Australia, global commodity traders from Archer Daniels to Cargill and Louis Dreyfus Corp. are running out of alternatives in Australia, Leyonhjelm said.

GrainCorp would “make sense” as a target for any of the three companies, he said. “GrainCorp is the only one left if you want critical mass fairly easily.”

Spokesmen for Archer Daniels, Cargill and Louis Dreyfus all declined to comment. Archer Daniels said last week that it decided not to bid for Viterra after considering it. Cargill, which acquired AWB’s commodity trading business from Agrium in 2010, said this month that its Canadian market share stopped it from bidding for Viterra.

GrainCorp also owns a Canadian maker of malt used for whiskey and beer, which means it stands to profit from the end of a 69-year-old wheat and barley monopoly held by the Canadian Wheat Board, Citigroup’s Mitchell wrote in a March 12 note.

Relative Value

Starting Aug. 1 farmers in western Canada will be able to sell to any buyer, rather than only the Canadian Wheat Board, which Viterra has said will boost its market share and profits.

GrainCorp could be worth A$11.11 a share to a buyer, or about A$2.4 billion including the value of its debt, according to RBS Morgans’s Moore. That’s 9 times Moore’s forecast for earnings before interest, taxes, depreciation and amortization of A$265.5 million in 2014, which reflects an “average season” for the company.

Glencore’s offer values Viterra at 11 times expected 2012 Ebitda. Applied to Moore’s 2014 Ebitda target, that multiple would value GrainCorp at A$13.94 a share. Because GrainCorp is smaller than Viterra, a lower multiple is more appropriate, with 9 times being the “average for Australian agribusinesses,” Moore wrote in a March 21 research note.

Applying the same 9 times Ebitda multiple to GrainCorp’s “sustainable” earnings of about A$260 million, Citigroup’s Mitchell says the company is worth about A$11 a share in a takeover. For the current year, GrainCorp is forecasting Ebitda of between A$350 million and A$380 million.

Make a Move

Buyers may wait for a pullback in the grain harvest, which has pushed GrainCorp’s earnings beyond levels likely in the long term, said James Ferrier, an analyst at Wilson HTM Investment Group in Melbourne.

“If GrainCorp was to get a bid, it would more likely happen when the weather cycle turns and we go back into a few dry years, similar to the scenario when Viterra acquired ABB Grain,” he said.

The A$1.9 billion purchase of South Australia-focused ABB Grain Ltd. was struck in May 2009, after two drought-affected harvests. Including the value of ABB’s debt, Viterra paid 17 times Ebitda, according to data compiled by Bloomberg. The company touted the acquisition’s potential to “provide greater exposure to the higher-growth Asian import market,” according to a statement at the time.

Australia has one of the world’s most variable rainfall climates, with three good years and three bad years every decade, according to the nation’s Bureau of Meteorology. Last year was Australia’s third-wettest year on record.

Still, takeovers in Australia will continue, said Mike Chaseling, deputy chairman of grain trader Emerald Group Australia Pty.

“The big question, post-Viterra, is does somebody look to make a move on GrainCorp?” he said. “We don’t think it stops here.”

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