Australia's GrainCorp buys AWB to create wheat giant

SYDNEY (Reuters) - Australia's GrainCorp (GNC.AX) has agreed to buy smaller rival AWB (AWB.AX) in an A$855 million ($770 million) deal to bulk up against big global competitors like Bunge Ltd (BG.N), Cargill and Glencore.

The surprise all-shares deal would create a combined Australian group with a market capitalization of more than A$2 billion and revenues of A$7 billion that will become the leading exporter in the world's fourth-largest wheat exporting nation.

It also dashed U.S. commodities firm Gavilon Group's long-running efforts to secure a 50-50 grain trading joint venture with AWB despite both sides announcing a deal in May.

AWB management said on Friday the GrainCorp deal offered more value for shareholders.

AWB shares rose 3.7 percent on news of the deal, while GrainCorp closed down 6.2 percent.

Competition is fierce for Australia's wheat industry which is counting on a bumper crop this year, while suppliers in Europe and Russia struggle with poor production. CBOT prices are up 36 percent this month, the biggest jump since 1973.

GrainCorp and AWB hope their combined forces will enable them to take advantage of growing food demand from Asia, the Middle East and North Africa.

"It's a matter of Graincorp reaching the level of business they need to really compete against a lot of the large European and North American groups," said E.L.& C. Baillieu senior analyst Ross Macmillan.

"AWB was on the verge selling some key parts of its business (to Gavilon) and it put Graincorp in a situation where it had to move pretty quickly, because the opportunities to expand by acquiring a listed agricultural company were becoming limited," he said.

SEARCHING FOR A PARTNER

AWB had been seeking to partner with a global player after losing its monopoly over Australia's bulk wheat exports two years ago, when the government abolished the single-desk system that the former Australian Wheat Board operated.

That followed an inquiry when AWB was found to have made illegal payments to win contracts in Iraq.

Liberalization of Australia's wheat trade saw majors including Cargill CARG.UL, Glencore and Bunge muscle into the Australian wheat export industry in direct competition to AWB.

Canada's Viterra Inc (VT.TO) acquired Australia's ABB Grain Ltd in a $1.4 billion deal last September, making it one of the world's largest gain handlers.

Incoming Graincorp CEO, Alison Watkins, who takes over on August 9, described the deal in terms of self-defense against the global giants. She is a former partner at strategy firm McKinsey and previously headed investment manager Bennelong Group.

"It would be hard for these two organizations if they remained apart to avoid the fate of being ultimately taken over by one of those strong international players," Watkins told Sky News.

Under the recommended transaction, still subject to regulatory approval, AWB shareholders will get one GrainCorp share for every 5.75 AWB shares, valuing each share at A$1.047, the firms said on Friday.

That is a premium of a bit over 9 percent to Thursday's closing price, below typical takeover premiums of 20-30 percent.

The deal values AWB at A$855 million based on Thursday's closing share price, according to Reuters calculations. GrainCorp shareholders would hold 58 percent and AWB 42 percent of the merged company.

Australia's 2010/11 wheat crop is seen around 22 million metric tons, just above the previous year's 21.7 million metric tons and could account for around 8 percent of global trade.

The deal, backed by AWB's directors, is subject to shareholder, regulatory and other approvals.

The Australian Consumer and Competition Commission said in a statement on Friday it was awaiting submissions from both companies before it reviews the deal.

The companies said the merger would deliver cost-savings of more than $40 million a year.

The combined firm will also become the world's fourth-largest commercial malt producer.

AWB downgraded its earnings guidance on Friday for the second time this year, forecasting full-year pretax profit to be in the range of A$75 million to A$95 million.

That was below the most recent guidance of A$85 million to A$110 million. In March, the company slashed its previous forecast of up to A$140 million in pretax profit.

Deutsche Bank advised AWB on the deal. GrainCorp was advised by Flagstaff Partners.

(Editing by Dhara Ranasinghe and Valerie Lee)