While we certainly would have enjoyed booking the gain that would have resulted had Archer Daniels Midland Co’s (NYSE: ADM) AUD3.2 billion bid to acquire GrainCorp Ltd (ASX: GNC, OTC: GRCLF) not been rejected by the Australian government, the deal was always somewhat bittersweet insofar as it meant we’d be foregoing the years of growth and income we’d hoped the stock would generate.
Now, of course, we have that opportunity again, though in the short term, the experience of owning GrainCorp’s shares since the deal fell through has been mostly bitter. The stock has fallen 32.1 percent since Treasurer Joe Hockey issued the politically motivated ruling that ADM’s acquisition of GrainCorp would be “contrary to the national interest.” That erased all of the deal’s premium, and for much of December and January, GrainCorp’s shares traded near where they’d been in late 2012 prior to ADM’s bid.
However, this week GrainCorp’s stock fell another 5.5 percent in local currency terms, which was 4.5 percentage points more than the broad Aussie market, as represented by the S&P/ASX 200. It also lagged more relevant benchmarks by similar amounts.
Though it’s reasonable to expect a stock to drop by the amount of the premium being offered once the bid for its acquisition is spurned, the additional selloff this week prompted understandable concern among some subscribers.
This week’s price decline appears to have been prompted by two news stories. The first was a report from Reuters detailing new competition the firm will face as emboldened competitors challenge its dominance now that it won’t necessarily be able to rely upon ADM’s deep pockets.
Western Australian grain exporter CBH Group is teaming with commodities trader Glencore Xstrata, among others, to build a new grains terminal on Australia’s east coast, not too far away from one of GrainCorp’s terminals, and it’s expected to open next month. CBH is also looking into the possibility of building storage sites in the country’s eastern states. Meanwhile, Reuters says tiny Melbourne-based Emerald Grain, which is partly owned by Japan’s Sumitomo Corp, is building up-country silos.
Despite this burgeoning competition, GrainCorp still holds the considerable advantage of incumbency in its territory. Indeed, the company’s network handles approximately 85 percent of the bulk-grains market trade in eastern Australia via its ownership of 280 up-country storage sites and seven grain port terminals.
Equally important, ADM still owns nearly 20 percent of GrainCorp’s shares outstanding and has the option to increase its holdings to 25 percent, which means the company is very much incentivized to ensure that it earns a proper return on its substantial stake. The wording of the government’s ruling also suggested that it would be open to approving a deal in the future once the industry further matures–it only just deregulated in 2008–and should ADM make inroads into assuaging concerns that underpinned political opposition to the deal among rural constituents.
In the meantime, GrainCorp would definitely benefit from a financial infusion to help upgrade key infrastructure, such as rails. Management has acknowledged that without ADM’s superior financial backing, its growth will occur at a slower pace as it deploys its own capital toward upgrades while rationalizing its storage and logistics division. Perhaps GrainCorp’s newfound competition will motivate ADM to find a way to offer additional financial support. We wouldn’t rule it out.
The other story this week, courtesy of The Australian, detailed how compensation for the company’s executives had soared to AUD13.6 million from AUD6.9 million a year earlier, largely due to the jump in share price resulting from ADM’s bid. The departure of key executives, such as soon-to-be former CEO Alison Watkins, also triggered the payout of accrued bonuses. Any boost in pay resulting from the aborted deal will certainly cause ire among shareholders, and it sounds like the board will reverse any compensation schemes tied to that deal.
When a stock is already suffering from negative sentiment, stories like these can cause it to fall much harder than it would during more optimistic times. But GrainCorp’s dominance of the region in which it operates along with its exposure to emerging Asia mean that it should still reward long-term investors.
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