Australia rejects ADM bid for GrainCorp takeover

GrainCorp Image credit: flickr User: rob3802

Australia turned down the A$2.8 billion takeover bid of GrainCorp by U.S. Archer Daniels Midland (ADM) on Friday.

GrainCorp Image credit: flickr User:  rob3802
Image credit: flickr User: rob3802

Despite the tempting offer, GrainCorp bowed to the pressure from grain growers, according to a report on Reuters.

As a result, GrainCorp shares took a serious dive at A$8.25, losing a quarter of their value.

The rejection by Treasurer Joe Hockey effectively restricted Australia’s last major independent grains handler from any takeover.

“It would have been great consolidation for ADM and beneficial for Australian farmers and the grains industry. It’s a pity it did not get through,” said Vijay Iyengar, Managing director of Singapore-based trading company Agrocorp International. “The food sector is always very sensitive.”

Treasurer Hockey said he rejected the proposal on national interest grounds after Australia’s Foreign Investment Review Board (FIRB) failed to reach a consensus recommendation.

Mr. Hockey further added that the deal was the only one of 131 significant foreign investment applications that had been rejected since he took office.

“Many industry participants, particularly growers in eastern Australia, have expressed concern that the proposed acquisition could reduce competition and impede growers’ ability to access the grain storage, logistics and distribution network,” Hockey told reporters in Sydney.

The rejection is a blow to ADM, which is more U.S.-focused and wants to improve its access to ever growing Asian markets.

According to GrainCorp Chairman Don Taylor, this step will deny Australia’s agricultural industry significant capital investment.

“The recent numbers from GrainCorp look pretty scary. So my feeling is the downside on GrainCorp is a lot lower than what it was trading at before this was announced, so really bad news for shareholders,” said Shannon Rivkin, a Director at Rivkin Securities.

Australia is the world’s second-largest wheat exporter. GrainCorp is the largest listed grains company which handles about one third of the country’s wheat production and dominates the east coast storage, distribution and marketing of grains.

Australia’s competition regulator initially approved the deal and analysts expected it to proceed.

However, farmers and many voters disapproved and were skeptical of another foreign deal in the grains industry following the increase in prices and unfavorable conditions brought about with the purchase of ABB Grain by Canadian Viterra in 2009.

The disapproval fueled disagreements and division between the Liberal Party and the rural-based National Party.

“Political expediency has overruled rational thought, in our view, with the treasurer succumbing to political pressure from the National Party, rural members of the Liberal Party and grower groups,” JP Morgan analyst Stuart Jackson said.

“All the way along we wanted ADM to show us how growers would benefit and no one could,” said Dan Cooper, a farmer in New South Wales and committee chair at the NSW Farmers Federation.

“People will interpret this as maybe Australia is not so ‘open for business’,” said Shane Oliver, head of investment strategy, AMP Capital Investors. “But I think it’s a one-off and will not set a precedent.”