GrainCorp Verdict Clouds Australia Open-For-Business Pledge

The Australian government’s decision to block Archer-Daniels-Midland Co.’s takeover of GrainCorp Ltd. comes 12 weeks after Prime Minister Tony Abbott’s election-night vow that Australia is open for business.

Citing national interest grounds, Treasurer Joe Hockey barred the A$2.2 billion ($2 billion) deal in the biggest rejection since Singapore Exchange Ltd.’s A$8.4 billion bid for ASX Ltd. was blocked in 2011. Also this week, Hockey flagged the possibility of taxpayer support for national carrier Qantas Airways Ltd. Australia’s dollar fell and GrainCorp’s shares plunged 22 percent after today’s announcement.

The GrainCorp decision “was a litmus test for the relative strengths of economic liberals and inward looking protectionists,” said Saul Eslake, chief Australia economist at Bank of America Merrill Lynch in Melbourne. “Today’s decision and the possibility of the government partially re-nationalizing Qantas, are from that perspective bad signs.”

Abbott’s Liberal-National coalition came to power Sept. 7 pledging to cut red tape for business and revive growth in an economy grappling with an elevated currency and waning mining-investment boom. Hockey’s decision is a win for the rural-based Nationals, who want increased scrutiny on foreign purchases of Australian land and had expressed concern over Decatur, Illinois-based ADM’s purchase of GrainCorp.

‘Government Unity’

“This decision was made with an eye on government unity as much as it was about the national interest,” said Paul Williams, a political analyst at Brisbane’s Griffith University. “The government can wear the knocks from the business community. What it can’t do is risk creating schism within the coalition.”

Nationals leader Warren Truss welcomed the decision, saying “the Australian grain industry must now get on with building a strong future for itself.”

Abbott said Hockey had acted as “the guardian of our national interests today” and reiterated his open-for-business pledge.

“We are open for foreign investment,” he told reporters in Adelaide. “It has to be foreign investment that accords with our overall national interest.”

Market Reaction

The Australian dollar fell 0.1 percent to 90.92 U.S. cents as of 4:26 p.m. in Sydney, heading for its sixth weekly drop. GrainCorp shares plunged A$2.48 to A$8.72.

The nation received a net A$57.6 billion in foreign direct investment for the year ended June 30, compared with A$59.5 billion in portfolio flows, according to data from the Bureau of Statistics.

The decision “risks undermining the federal government’s statement that Australia is open for business,” Business Council of Australia Chief Executive Jennifer Westacott said in an e-mailed statement. “It is important this decision does not increase uncertainty in the global community about the rules of the game on competition and Australia’s policy settings on foreign investment generally.”

The American Chamber of Commerce in Australia said it’s “concerned about the implications for foreign investment in Australia” from the decision. “While fully recognizing the sovereign right of the Australian government to make a national interest determination as part of their foreign investment approval process, AmCham is concerned about the signals this decision may send to other potential foreign investors.”

Level of Concern

The takeover proposal had attracted “a high level of concern from stakeholders and the broader community,” Hockey said today in a statement after advice from the Foreign Investment Review Board. “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.

Shadow Treasurer Chris Bowen said the rejection showed Australia is “not open for business.”

“The claims by this government that they would lure back investment into Australia lie in tatters this morning because Joe Hockey is too weak a treasurer to do the right thing by Australia,” Bowen told reporters in Sydney.

Qantas Cap

Hockey said yesterday the government was considering whether to lift a cap on foreign ownership of Qantas to “level the playing field” with Virgin Australia Holdings Ltd. The second-ranked carrier earlier this month announced a share sale that could lift foreign airlines’ holdings of its stock as high as 70 percent.

A government buyback of up to 10 percent of Qantas has emerged as an option, the Australian Financial Review reported today, citing senior sources it didn’t identify. Hockey declined to comment on what he called press speculation.

“It looks a bit messy,” said Shane Oliver, head of investment strategy at AMP Capital Investors Ltd. “You’ve got talk of the federal government buying back a bit of Qantas, the GrainCorp decision, and those two are coming fairly close together only a few months after Tony Abbott declared Australia open for business.”

Still, Oliver said “we’re not going back to the dim-dark days of government intervention in the economy.”