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UPDATE: Archer Daniels Buys Stake in Australia's GrainCorp, Takeover Looms

Date : 10/19/2012 @ 1:43PM
Source : Dow Jones News
Stock : Graincorp Fpo (GNC)
Quote : 8.98  0.02 (0.22%) @ 2:20PM
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UPDATE: Archer Daniels Buys Stake in Australia's GrainCorp, Takeover Looms

Archer Daniels (NYSE:ADM)
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--Archer Daniels buys 10% GrainCorp stake

--GrainCorp says Archer open to bigger deal

--Australian agriculture assets appealing amid Asia boom

(Recasts lead, adds analyst remarks from twelfth paragraph)

By Gillian Tan and Caroline Henshaw

SYDNEY--Archer Daniels Midland Co. (ADM), one of the world's biggest soft-commodity merchants, bought 10% of GrainCorp Ltd. (GNC.AU) and is open to a bigger deal, the Australian grain company said Friday.

GrainCorp's announcement of the transaction--which confirmed an earlier Wall Street Journal report--underlined the growing appeal of Australian agricultural assets at a time when Asian demand for food and other soft commodities is expected to skyrocket.

GrainCorp indicated that U.S.-based ADM may be considering a formal approach for the company, the largest of Australia's listed agribusinesses which owns about half of the grain-storage facilities in Eastern Australia. ADM already has a presence in Australia through an 80% stake in smaller grain handler Toepfer International.

ADM "wishes to engage in discussions with GrainCorp concerning a potential transaction," the Australian company said in its statement, adding it hadn't received any formal offer. "Should GrainCorp receive a proposal from ADM, the board will review the proposal as well as other options."

Credit Suisse is advising GrainCorp and Citi is advising ADM.

ADM's move follows similar pushes by rivals Cargill Inc. and Glencore (GLEN), both of which have taken a slice of Australia's agricultural industry in a bid to cash in on booming food demand from Asia's growing middle class.

A takeover of GrainCorp by ADM may herald a new wave of consolidation in Australia's agricultural industry, which is expected to earn the country as much as A$35 billion (US$36 billion) this financial year, according to government estimates.

Some forecasters have said they expect world food demand to rise by 60% from 2007 levels over the next four decades as the world's population grows, and more people--particularly in rapidly-expanding Asian markets--are able to afford to eat more grain-intensive food, such as meat.

Rising demand in Asia may boost agriculture exports from Australia and New Zealand by as much as $2.8 trillion by 2050, according to research published Friday by local lender Australia & New Zealand Banking Group Ltd. (ANZ.AU).

A block of 22.8 million GrainCorp shares, or 10% of the company, was traded early Friday at A$11.75 a share--a 33% premium to its last closing price of A$8.85. That valued the company at 2.7 billion Australian dollars (US2.8 billion). The highest GrainCorp shares have traded since listing in 1998 is A$11.25, a peak reached in February 2005.

GrainCorp's shares will remain in a trading halt until Tuesday.

"Given the scale and strategic nature of GrainCorp's assets and the fact that it is the last remaining significant grain company capable of being taken over in Australia, we expect a number of parties could be interested in GrainCorp and a bidding war may emerge," RBS Morgans analyst Belinda Moore said.

The company mainly trades wheat, barley and canola, which it supplies to more than 25 countries. While it sells mainly to North American, European and Australian markets, GrainCorp like other suppliers is keen to exploit the shift in economic power from the West to Asia.

The company bought businesses from Australia's Gardner Smith and Goodman Fielder (GFF.AU) in late August for A$472 million, to create an edible-oils unit.

At the time, GrainCorp's Chief Executive Alison Watkins said she expected group fiscal-2012 earnings before interest tax, depreciation and amortization, or Ebitda, at the upper end of a previously-guided range of between A$385 million and A$415 million. The company's financial year ends Sept. 30.

Founded in 1916, GrainCorp was once part of the New South Wales state government's Department of Agriculture. After being privatized in the late 1980s, GrainCorp went on to acquire smaller regional Australian grain handlers including Vic Grain, Grainco and Hunter Grain.

In 2009, GrainCorp established its malt unit with the purchase of United Malt Holdings for A$757 million, and last year boosted the division with the acquisition of Germany's Schill Malz for 58 million euros (US$75.8 million).

Eastern coastal states, including New South Wales, Victoria and Queensland, make up about two thirds of Australia's grain-producing territory, and companies there already export about a third of their output.

An equity analyst at Macquarie Group, Rikki Bannan, said in a note to clients that an offer for GrainCorp at A$11.75 a share would imply an Ebitda multiple of 8.2--a fraction below the 8.8 multiple offered by Glencore International (GLEN) in its pending 6.1 billion Canadian dollar (US$6.2 billion) acquisition of Viterra Inc (VT).

The Glencore-Viterra deal is yet to be approved by China's Ministry of Commerce.

Recent Australian transactions--including Agrium's A$1.2 billion acquisition of AWB in 2010 and Viterra's A$1.6 billion acquisition of ABB Grain in 2009--were at multiples of 9.5 times and 11.3 times, respectively. In late 2010, Agrium later sold a chunk of AWB to Cargill.

"Given favorable underlying global agricultural market trends, such as growth in populations and protein consumption per capita in emerging markets, and the growing importance of global food security, agriculture businesses are increasingly attractive acquisition targets," Macquarie's Ms. Bannan said.

Macquarie believes ADM's interest in GrainCorp brings into focus the potential for further consolidation in the listed Australian agricultural sector.

Other listed agricultural stocks rose Friday, with Nufarm (NUF.AU), Bega Cheese (BGA.AU) and Warrnambool Cheese & Butter Factory Co. (WCB.AU) all outperforming the benchmark S&P/ASX 200 Index.

Write to Gillian Tan at gillian.tan@wsj.com and Caroline Henshaw at caroline.henshaw@wsj.com.

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