Not quite the season to be jolly for GrainCorp
'If a deal is done it won’t be priced much higher than the one already proposed'.
AN unexpectedly active lead-in to a Christmas break that is now only two working weeks away looks set to continue, with GrainCorp likely to confirm by the end of next week that US group Archer Daniels Midland Company is still not offering enough money to secure a friendly $2.8 billion takeover.
ADM proposed an $11.75 a share cash takeover subject to due diligence in mid-October, and moved to the foreign takeover threshhold of 14.9 per cent by acquiring shares and parking them using derivative contracts.
There was no deadline for GrainCorp to respond because ADM did not launch a formal offer, and while it already had internal valuation models, GrainCorp decided to conduct a thorough bottom-up valuation of itself that had the advantage of creating time for potential counter-bidders to emerge.
ADM was already on board with a blocking stake, however, and was the only suitor in mid-November when GrainCorp announced record annual earnings of $205 million and said ADM's offer materially undervalued the company.
On Monday night ADM bought more shares to move to the 20 per cent takeover threshold, and told GrainCorp it was prepared to pay $12.20 a share subject to due diligence, regulatory approval and other conditions.
ADM also said shareholders would retain the Australian group's 35¢ a share final dividend, but they are already entitled to that. Ignoring it, the price bump is 4 per cent.
ADM is now offering to pay almost 40 per cent more than GrainCorp shares were fetching before it first approached, comfortably satisfying a rule of thumb in the takeover game that a share price premium of at least 30 per cent is needed to get a target's board talking.
The GrainCorp board is, however, unlikely to consider a 4 per cent price bump sufficient to overcome what it called a ''material'' shortfall in the original takeover proposal, and earlier agribusiness deals have been richer.
Takeover multiples in the industry are difficult to compare because grain company earnings move up and down depending on the size of grain harvests, but ADM is valuing GrainCorp at about 8.5 times earnings before interest, tax, depreciation and amortisation, and the ''across the weather cycle'' average for earlier Australian acquisitions, including the Canadian takeovers of ABB by Viterra and AWB by Agrium, is about 9.5 times. A current takeover of Viterra itself by commodity trading group Glencore is pitched at 10.4 times.
Both groups will be treading carefully now. The US group has built its 20 per cent stake easily, has revealed that the minimum acceptance condition on a bid would only be 50 per cent, and is under pressure in its own market over the Australian excursion, with credit-rating group Moody's joining Fitch Ratings and Standard & Poor's this week in placing it on negative credit-watch over the potential $2.8 billion outlay.
If a deal is done, it won't be priced much higher than the one already proposed, and GrainCorp will have unhappy shareholders on its register if it doesn't work out how to signal that it needs more, but also keep the door ajar. An interim step that creates negotiating space before formal due diligence is one possibility.
Cheery about China
WANG Tao, UBS's China economist, is a former China specialist for the International Monetary Fund, and if her predictions for China next year are correct, the world will dodge a bullet.
She believes a recovery that began in China this quarter will endure next year and lift growth slightly, from around 7.6 per cent in 2012 to 8 per cent in 2013.
One of the surprises this year was that Beijing didn't take major steps to try and boost growth, and Wang Tao says the government's softly-softly approach is likely to continue as it shepherds a recovery that does not reignite inflation and a property price bubble.
Property sales are recovering under their own steam, she says, and that is a crucial call: the housing market is China's biggest cyclical growth driver, and if it recovers without becoming a bubble, China as a whole will cycle out of the growth recession it encountered this year.
On UBS's scenario, higher housing investment will be balanced by lower corporate investment as companies react to this year's slowdown, consumption and infrastructure spending will remain robust without being pumped up by the government, a period of destocking will continue, and the urbanisation push will continue to underpin solid growth in infrastructure investment.
Europe's problems and America's fiscal cliff place a question mark over Western demand for Chinese exports, which UBS predicts will rise by 8 per cent in 2013, in line with 2012. But on Wang Tao's scenario it is China's domestic economy that underpins a recovery that is modest, but good enough to ease concerns that China will be a drag on global growth and commodity prices in 2013.