Morningstar | GrainCorp Receives AUD 10.42 Offer, but We’re Not Convinced Deal Will Happen; FVE to AUD 9.40
No-moat GrainCorp announced on Monday, Dec. 3 that it received an indicative offer from Long-Term Asset Partners, or LTAP, to acquire the company for AUD 10.42 per share--a total of about AUD 3.4 billion, including GrainCorp’s AUD 1 billion of net debt. This represents a 43% premium to Friday’s closing share price and a 25% premium to our standalone AUD 8.30 per share valuation.We’re not convinced this deal will take place and assign a 50% probability that GrainCorp will remain a standalone business. We also don’t anticipate another bidder given the full price we think LTAP has offered. Our fair value estimate therefore moves to AUD 9.40 per share--the average between our standalone valuation and the offer price.
As a reminder, GrainCorp accepted an AUD 3.4 billion bid from U.S. agricultural conglomerate ADM in 2013 but saw this knocked back by the Australian treasurer at the time, Joe Hockey, after a lack of consensus from the Foreign Investment Review Board, or FIRB. The most pressing issue was foreign ownership of GrainCorp’s assets, although Hockey also cited industry concerns regarding access to key storage and logistics infrastructure. In addition, the Australian Financial Review, or AFR, reports that GrainCorp would be LTAP’s first company buyout, planned for inclusion in a fund not yet created.
Nonetheless, LTAP reportedly consists of Australian passive investors, alleviating concerns around potential FIRB or ACCC objection. In addition, LTAP already owns 4.2% of GrainCorp and plans to retain the target’s assets, without sizable divestitures, likely alleviating other stakeholders’ concerns about the future of the company. Despite the AFR reporting that the buyout firm’s debt funding is relatively firm at this point, we anticipate challenges in receiving an investment-grade rating in a more highly geared GrainCorp given high uncertainty stemming from unpredictable yearly weather patterns, reinforcing our doubt in the deal’s eventuality.
GrainCorp is a food ingredients and agribusiness company. Co. focuses its activities on three main grains (wheat, barley and canola). Co.'s reporting segments are: Storage and Logistics, which include grain receivals, transport, testing, storage of grains and other bulk commodities; Marketing, which markets grain and agricultural products and operates grain pools; Malt, which produces malt products, provides brewing inputs and other malting services, sells farm inputs, and exports malt; and Oils, which includes the processing and crushing of oilseeds. Co. also has a 60.0% joint venture interest in Allied Mills Australia Pty Ltd, a supplier of milled edible flour for human consumption.
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