ADM's $2.8 billion GrainCorp bid seen flushing out more offers

SYDNEY Sun Oct 21, 2012 10:37pm EDT

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SYDNEY (Reuters) - U.S. agriculture giant Archer Daniels Midland (ADM.N) has bid $2.8 billion for GrainCorp (GNC.AX), sending shares in Australia's last independent grains handler soaring, as markets bet on a higher offer price or rival bids being flushed out.

ADM's bid comes at a time of consolidation in the global grains sector amid intense competition for grains trading power to feed fast-developing countries seeking food security.

Australia is a coveted market with a stable policy regime and good links to Asia. After a string of deals GrainCorp is the last available asset, which can give full access to the world's second-biggest wheat exporter.

"The market is clearly speculating the offer won't be successful as it is. There is hope for rival offers or a higher price to seal the deal. It is very early days," said Paul Xiradis, chief executive at fund manager Ausbil Dexia, which owns shares in the Australian grains group.

GrainCorp shares, which rose as much as much as 43.4 percent in early trade on Monday, were quoted at A$12.41 at 0136 GMT valuing the firm at A$2.83 billion ($2.93 billion). That compared with the A$11.75 a share bid from ADM.

Analysts felt the bid undervalued GrainCorp, based on past deals. With a potentially long list of rival bidders including Cargill, Bright Foods, Bunge (BG.N), Wilmar (WLIL.SI) and Louis Dreyfus, they expected the board to play hardball.

GrainCorp said it was reviewing the offer by ADM, which has a 14.9 percent stake in the firm now. The bid is subject to a number of conditions including exclusivity and due diligence.

GrainCorp operates seven of the eight bulk grain elevators in eastern Australia, handling as much as 60 percent of the region's wheat, barley, canola, chickpea and sorghum crops. It has about 20 million metric tons of storage at more than 280 inland grain handling sites, the company says.

"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 A$11.88 to A$13.43 a share, based on Canadian grain company Viterra's VT.TO acquisition of ABB Grain in 2009 and Glencore's (GLEN.L) bid for Viterra [ID:nL1E8KQ769]

Archer Daniels' bid values GrainCorp at eight times 2012/13 earnings before interest, taxes, depreciation and amortization, while past deals in the sector paid more than 10 times.

GLOBAL CONSOLIDATION

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 compounded by the entry of tough new competitors and volatile markets.

The move is not ADM's first signal that it wants to bulk up and push ahead of less acquisitive rivals like Cargill while seeking to fend off new challengers such as Glencore and Singapore's Olam (OLAM.SI).

Nearly seven months ago ADM pulled out of the race to buy Viterra, which was eventually bought by No 1 global commodities trader Glencore in a deal worth C$6.2 billion ($6.2 billion then).

In May, Japan's Marubeni (8002.T) bought U.S. grain merchant Gavilon, whose owners included billionaire investor George Soros, highlighting the intensifying competition for a foothold in the North American supply chain.

The sector has seen deals in Australia too. Besides Viterra's buy of ABB Grain, Agrium (AGU.TO) bought AWB for A$1.2 billion in 2010 and Cargill bought AWB's port and up-country storage assets. Sumitomo bought Australian Bulk Alliance port and storage assets.

Growing international interest in Australia's agricultural businesses has led to a backlash in some quarters and can be politically sensitive.

A purchase by ADM would need the approval of Australia's Foreign Investment Review Board, though since regulators had approved past deals analysts did not immediately foresee major regulatory hurdles for ADM or other foreign bidders.

Business has been booming in the sector and GrainCorp raised its forecast for 2012 earnings before interest, tax, depreciation and amortization (EBITDA) to A$385-A$415 million in May after posting stronger-than-expected first-half earnings.

Credit Suisse and Greenhill are advising GrainCorp. ($1 = 0.9668 Australian dollars)

(Editing by Ed Davies)

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