GrainCorp Traders Lose Hope ADM Will Boost Bid: Real M&A

Traders are losing faith that GrainCorp Ltd. can extract a higher takeover bid from Archer-Daniels-Midland Co. or a competitor as a dip in Australia’s wheat crop shrinks the exporter’s profits.

The Sydney-based grain handler has rebuffed ADM’s advances, even after the world’s largest corn processor in December raised its offer for GrainCorp to A$2.8 billion ($2.9 billion). GrainCorp shares, which traded above the sweetened offer as recently as March 1, have since fallen as investors give up hope of another price boost or a counterbid. The stock closed at A$11.76 yesterday, the most below ADM’s A$12.20-a-share bid since it was announced, according to data compiled by Bloomberg.

“You’re better off taking the money in the market and not having the risk,” Dennis Hulme, an analyst at BBY Ltd. in Sydney, said in a phone interview. “The longer it goes without a competing bid, the less likely it is that one will happen.”

The stock decline is giving Decatur, Illinois-based ADM, which already owns almost 20 percent of GrainCorp, increased negotiating power for its current offer, said Elevation LLC. With GrainCorp’s profit projected to slide 23 percent during the next two years as Australia’s wheat exports decline, ADM may succeed at the current price, particularly if harvests miss forecasts and the stock falls further, said Emerald Group Australia Pty.

GrainCorp shares fell as much as 1.4 percent in Sydney trading today, the most in four months. At A$11.68, the shares ended below ADM’s opening offer for GrainCorp, which was later raised, for the first time since that bid was disclosed.

Shipping Grain

GrainCorp operates seven of the eight ports from which grain is shipped in bulk from Australia’s east coast. Since Australia stripped AWB Ltd. of its wheat-export monopoly in 2006, Glencore International Plc, Cargill Inc. and Agrium Inc. are among foreign commodity traders that have snapped up former farmer-owned assets in the country.

ADM said Oct. 19 that it boosted its GrainCorp stake to 14.9 percent from 4.9 percent and wanted to buy the rest of the company. It now owns almost 20 percent, data compiled by Bloomberg show. The initial A$11.75-a-share cash offer valued GrainCorp at A$2.68 billion excluding debt, already making it ADM’s biggest-ever takeover if completed, data compiled by Bloomberg show.

Stock Drop

After GrainCorp said the proposal “materially undervalues” the company, ADM raised the bid to A$12.20 a share on Dec. 3 and said it was dependent on support from GrainCorp’s board. GrainCorp said the second offer was still too low.

GrainCorp’s shares, which climbed as high as A$12.38 in December, traded above the higher offer as recently as March 1 as traders who profit from mergers and acquisitions wagered on competing offers or another boost from ADM. Down 4 percent since then, the stock closed yesterday at A$11.76, its lowest level since ADM’s first approach, data compiled by Bloomberg show.

Angus Trigg, a spokesman for GrainCorp, declined to comment on matters relating to ADM’s bid. Jackie Anderson, a spokeswoman for ADM, declined to comment beyond a Dec. 12 statement that the company intends to consider all options regarding GrainCorp.

“There’s really nothing to update because there has been no further conversation with them since their rejection of our last proposal,” ADM Chief Executive Officer Patricia Woertz said during the company’s earnings call last month.

ADM Leverage

ADM, with a stake large enough to deter rival bidders, is gaining power over GrainCorp and may be able to bypass its board of directors, John Maysles, an event-driven senior analyst at Elevation in Los Angeles, said in a phone interview.

“ADM might be gaining some leverage,” Maysles said. “If the arbitrage holding gets large, ADM could go directly to shareholders with the current price or a little higher. They would want to have a friendly deal, but GrainCorp management probably still believes it’s worth over A$13.”

Though GrainCorp’s board hasn’t specified what price it would accept, there’s little chance of ADM meeting those expectations given the poor outlook for Australia’s wheat crops, according to Peter Rae, a Melbourne-based analyst at Morningstar Inc.

“ADM probably won’t be prepared to pay the sort of money GrainCorp is looking for at this stage,” he said by phone. “The last few years have been really great for GrainCorp in terms of the crop size. The expectations are that it’s not going to be there this year or next year -- more like average years.”

Grain Exports

Australia’s wheat harvest plummeted 26 percent to 22.1 million metric tons in the year through this month, from a record 29.9 million tons a year earlier, according to a March report from the Australian Bureau of Agriculture and Resource Economics and Sciences. Still, the next year, the crop production is expected to rebound to about 24.9 million tons.

Australia, last season’s second-biggest wheat shipper, is forecast to see export volumes of the grain decline for the 2012-2013 season and the following three straight years, the report showed.

The harvest is set to weigh on GrainCorp earnings. After reporting a record profit of A$205 million for the year ended Sept. 30, 2012, the grain handler is projected to earn A$174 million this fiscal year, and A$158 million the next year, according to analyst estimates compiled by Bloomberg.

No Pressure

Given those forecasts, ADM’s bid was “reasonable,” said Alan Winney, chairman of Emerald Group Australia, the third-largest storage and handling network in eastern Australia.

“ADM’s waiting GrainCorp out at the moment because the forecasts going forward aren’t as strong as recent years’ results,” Winney said in an interview. If the crop from wheat that’s planted next month misses GrainCorp’s expectations, ADM’s bid “might look like a very good price,” he said.

Farmers in Australia plant their wheat crop in about April for harvest starting in about November.

Still, GrainCorp last year only generated 56 percent of its sales through crop trading, down from 75 percent in fiscal 2009, according to data compiled by Bloomberg.

In addition to its infrastructure, which includes 21 million metric tons of storage capacity at more than 280 inland grain-handling sites, GrainCorp produces more than 1 million tons of malt each year.

ADM has a market value of $21.7 billion, which is more than seven times that of GrainCorp, and isn’t under pressure from shareholders to close the deal, Farha Aslam, an analyst at Stephens Inc., said in a phone interview.

“ADM has many opportunities around the globe,” said Aslam, who is based in New York. “GrainCorp is an interesting one, a good one, but not a necessary one.”