GRAINCORP shares surged 41 per cent to $12.50 this morning after the company confirmed an indicative, $2.7 billion cash bid from US agribusiness giant Archer Daniels Midland.
Graincorp, which halted trading in its shares on Friday in anticipation of the takeover offer, said this morning it was reviewing ADM’s bid at $11.75 a share, which is subject to a number of conditions including exclusivity and due diligence.
ADM snapped up 10 per cent of Graincorp on Thursday night at the same price – a 33 per cent premium to the closing price of $8.85 that day. Graincorp shares jumped $3.65 in the first minutes of trade this morning.
In a note to clients RBS Morgans analyst Belinda Moore recommended investors hold on to their Graincorp stock in anticipation of an increased offer, possibly north of $13 a share, either from ADM or from a rival bidder.
‘‘In our view, the offer price isn’t high enough,’’ she wrote. ‘‘Based on an average season and including Graincorp’s target to grow earnings before interest tax depreciation and amortisation (EBITDA) by $40 million by the end of 2013-14, we value the company at $9.77 per share. Including the usual takeover premium of 30 per cent, this implies a takeover price of $12.70 per share for Graincorp.”
ADM now has a total 14.9 per cent economic interest in Graincorp but Ms Moore said ‘‘we wouldn’t rule out another party bidding for the company given the scale and strategic nature of its assets and the fact that it is the last remaining significant grain company capable of being taken over in Australia’’.
With a potentially long list of rival bidders including Cargill, Bright Foods, Bunge, Wilmar and Louis Dreyfus, analyst expect Graincorp’s board to play hardball.
Australia is a coveted market as the world’s second-largest wheat exporter with a stable government and policy regime, yet some analysts who know Archer Daniels primarily as the top US corn processor and a major producer of ethanol were surprised.
“Given the strategic value of the GrainCorp assets and this is the last remaining grain company in public ownership, we believe there could be other interested parties such as other grain related companies or an Asian buyer,” Deutsche Bank analyst Mark Wilson said in a research note.
JPMorgan said in a note to clients that Graincorp should be valued at between $11.88 to $13.43 a share, based on Viterra’s acquisition of ABB Grain in 2009.
The bid values Graincorp at eight times 2012-13 earnings before interest, taxes, depreciation and amortisation, while past deals in the sector paid more than 9.5 times, analysts said.
Archer Daniels has said it acquired a 14.9 per cent stake through equity derivative contracts.
The bid comes as the four “ABCD” firms that have dominated the global agricultural business for decades – Archer Daniels, Bunge, Cargill and Louis Dreyfus – are emerging from a period of dismal earnings amid tough new competitors and volatile markets.
The move is not Archer Daniels’s first signal that it wants to bulk up and push ahead of less acquisitive rivals like Cargill while seeking to fend off eager new challengers such as Glencore and Singapore’s Olam.
Nearly seven months ago Archer Daniels pulled out of the race to buy Canadian grain company Viterra, which was eventually bought by No 1 global commodities trader Glencore in a deal worth $C6.2 billion ($6.15 billion then).
In May, Japan’s Marubeni bought US grain merchant Gavilon, whose owners included billionaire investor George Soros, highlighting the intensifying competition for a foothold in the North American supply chain.
Graincorp is the last available asset with full access to the Australian grain market.
Business has been booming in the sector and Graincorp raised its forecast for 2012 earnings before interest, tax, depreciation and amortisation (EBITDA) to $385-$415 million in May after posting stronger-than-expected first-half earnings.
Credit Suisse and Greenhill are advising Graincorp.
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