GrainCorp rejection tarnishes Australia's "open for business" sign

Sun Dec 1, 2013 3:59pm EST

* Australia blocks $2.6 bln ADM takeover of GrainCorp

* Rejection doesn't set legal precedent, but could spook investors

* Investors need to play political game

* Door left ajar for ADM to have another tilt

By Jane Wardell

SYDNEY, Dec 2 (Reuters) - Australia's "open for business" sign is swinging precariously in the wind after the government blocked a A$2.8 billion ($2.6 billion) takeover of GrainCorp by U.S. agribusiness giant Archer Daniels Midland (ADM) .

The surprising decision to bow to pressure from grain growers is likely to spook foreign investors, who already think pushing a deal through in Australia is tough, international lawyers and bankers who work in mergers and acquisitions said.

Treasurer Joe Hockey rejected the deal - the third-biggest takeover by a foreign company in Australia to be blocked - after the Foreign Investment Review Board (FIRB) had failed to reach a consensus recommendation.

Citing national interest, Hockey said domestic grain growers were concerned the takeover of a company handling a third of Australia's wheat production would reduce competition and impede their businesses.

Although the rejection does not set a legal precedent because prospective foreign deals are judged by FIRB on a case-by-case basis, it reinforces the perception Australia is not as open for business as it likes to think.

"We need to be careful about the message we are sending," said Malcolm Brennan, a special counsel at law firm King & Wood Mallesons where he advises clients on Australia's foreign investment regime. "There are so many myths out there and we are in competition with others for deals."

In reality, FIRB passes the vast majority of deals it reviews. It rejected just 13 of more than 11,000 applications in fiscal 2012, all related to real estate.

In a high-profile bidding war for Australia's Warrnambool Cheese and Butter Factory Holdings Ltd, Canada's largest dairy maker Saputo Inc found its A$515 million bid quickly waved through by the FIRB.

So quickly, in fact, that a rival local bidder Murray Goulburn Co-operative Co Ltd complained of an unfair playing field as it has to wait six months for competition approval for its own bid.

Aware of the potential repercussions of the ADM rejection, Prime Minister Tony Abbott said on Friday he wanted to "make it absolutely crystal clear that we are open for business, we are open for foreign investment".

He stressed it was the first rejection among 131 significant foreign investment applications since his conservative Liberal Party-led Coalition government took power in September.

FOREIGN FEARS

But experts in the field said the reality does not weigh heavily enough on the perception.

"Chinese and other Asian investors are of the view that FIRB is a difficult process and if a deal goes to FIRB it is the end of the deal," said Brennan.

Scott Weldon, director research and trading at Duxton Asset Management in Singapore, said the bid was rejected on "potentially reasonable grounds" because of GrainCorp's national strategic importance and dominance in the market.

Australia is the world's second-largest wheat exporter and GrainCorp is its largest-listed grains company. It dominates east coast storage, distribution and marketing of grains, handling 85 percent of that region's exports.

"We would hope this does not reflect a change for policy affecting smaller foreign investments into the agricultural sector," Weldon said. Duxton manages around $430 million in agricultural assets for its clients.

The American Chamber of Commerce in Australia said it was very concerned about the signal the ADM decision sends to other potential foreign investors.

"Like many others, AmCham had been watching this particular investment application carefully, knowing it would inevitably have a real impact on American and foreign perceptions of Australia as a place to invest," Niels Marquardt said.

The U.S. is the largest foreign investor in Australia, with a stock of foreign direct investment approaching $150 billion.

Marquardt said he recognised the ADM decision was a statistical anomaly, but "nonetheless we are concerned about its impact."

POLITICAL GAMES

Of major concern is the role played by politics and public opinion in the ADM deal. The purchase had previously been approved by Australia's competition regulator and analysts had expected it to proceed.

But it was unpopular with farmers and many voters and had stoked divisions between Abbott's Liberal Party and its junior partner, the rural-based National Party.

"The new government is seemingly more sensitive to factors affecting the agricultural sector and smaller farmers' ability to do business, which constitute a large portion of their supporter base," said Weldon, of Duxton Asset Management.

Parallels could be drawn with the intense political debate that surrounded the landmark $15.1 billion acquisition of Canadian company Nexen Inc by state-owned Chinese oil firm CNOOC Ltd earlier this year.

That purchase resulted in a policy backlash by the Canadian government, which raised the bar for future acquisitions by state-owned enterprises of its vast oil sands reserves, limiting them to minority stake holders.

Adam Strauss, a partner at Herbert Smith Freehills, a law firm advising Yancoal Australia Ltd in a potential buyout by its Chinese parent, Yanzhou Coal Mining Co Ltd , said the ADM decision highlighted the need to play a political as well as an investment game.

"I think a lesson for foreign investors is really about managing stakeholders in the media and politics so you don't lose control of the way the deal is perceived," Strauss said. "ADM probably lost control of the debate and failed to win those stakeholders over in terms of what they were offering."

DOOR AJAR

The ADM investment is the third-biggest rejection of a foreign company by Australia, law firm King & Wood Mallesons says. It ranks behind Royal Dutch Shell PLC's A$6.5 billion bid for Woodside Petroleum Ltd in 2001 and Singapore Exchange Ltd's A$8.4 billion bid for ASX Ltd in 2011.

"Like the other two high-profile ones that have been blocked  there's reasonably specific circumstances that aren't going to apply to much else," said an investment banker, who declined to be identified because he was not authorised to speak publicly on the matter.

And in one positive, unlike the Woodside and ASX deals, the government has left the door open for ADM, flagging it would approve a proposal to raise its stake in GrainCorp to 24.9 percent from the current 19.85 percent.

"ADM can take a little more time, show their bona fides over a period of time," said Brennan. That could lead to another chance at a takeover in the future.

"GrainCorp isn't a protected species."

Comments (0)
This discussion is now closed. We welcome comments on our articles for a limited period after their publication.