There have been few takeovers over the years that the Foreign Investment Review Board (FIRB) has prohibited. The two high profile ones that come to mind are: Shell’s bid for Australian energy giant, Woodside Petroleum; and the Singaporean based bid for the ASX. Woodside was seen as being of significant national interest due to its substantial energy assets. The ASX of course, is a critical utility in Australia’s finance infrastructure and was seen as too valuable to fall into foreign hands, despite the industry de-regulating and the support of the ASX Board for the bid.
Government split
Today, we find ourselves in the midst of another bitter dispute over the current controversial takeover bid for Graincorp Limited (ASX: GNC), which has split the recent, election-winning Coalition down the middle. The country-based Liberals and the National Party have been forced to go public with their concerns after (it appears) being unsuccessful in their behind-the-scenes lobbying of the Treasurer to disallow the bid. This conflict has spilt into the mainstream media in spectacular fashion, with the Deputy Prime Minister Warren Truss (and others) speaking out against the acquisition of Graincorp by US-based, global agribusiness, Archer Daniels Midland. In response, the Treasurer, Joe Hockey, has made forceful comments that he will not be bullied. Graincorp controls the majority of grain handling and exporting facilities on the Australian east coast, which are seen as critical and strategic by many in the grain farming industry.
The farmers and the Nationals are adamant that it is not in Australia’s best interest for the bid to proceed, while the Liberals want to be seen as being ‘open for business’.
The farmers appear united in their opposition to a foreign company taking control of such an intrinsic part of their farming industry and question how a global player will prioritise the interests of Australian farmers, as Graincorp is perceived to do now.
Graincorp Limited (GNC)
Unfortunately, the Australian agricultural industry does not have any major listed companies, whereas the mining industry has what was called the ‘Big Australian’, BHP. Also, it is disappointing from an Australian investor’s perspective that slowly all the listed agricultural plays, such as the Australian Wheat Board and the Australian Barley Board, have been taken over mostly by international players.
I believe it will be no different this time with Graincorp.
An attractive buy
As investors, our role is to allocate capital where we believe the odds favour us making money for our investors, and buying Graincorp appears attractive on that basis. Even though it is a risky play.
Our analysis of the facts led us to believe the Treasurer will approve the deal, with conditions designed to protect the farmers.
It is interesting that the internal political tensions have flowed into the public domain, suggesting that opponents have taken this course out of frustration. For investors, this could have created a very attractive buying opportunity.
The stock is currently trading at about $11.15. The bid is made up of $12.20 cash, plus a 75c franked dividend, with an additional 3.5c franked dividend for each full month of delay after 31 September 2013. The Treasurer has said he will announce his decision on the FIRB’s recommendations by the 17 December 2013. In the event that it is approved, we expect to get paid by February 2014, giving us a cash return of 190.5c per share (17%) or 59% annualised. This return does not include the value of the franking credits. The risk is the takeover bid gets blocked, which would result in Graincorp’s share price falling about 25% to its pre-bid price. We believe the odds are in favour of the bid succeeding and therefore see the risk/reward ratio as attractive.