GrainCorp offer remains shrouded in mystery

Due to a technical glitch, our APAC readers yesterday received the wrong version of our weekly editorial letter. Please find the correct one below.

The mysterious takeover offer for GrainCorp, announced on Monday last week, raised a lot of questions among those involved in the ag space and outside.

Not least of those questions is who exactly is backing Long-Term Asset Partners, the new fund manager that emerged out of the blue to make the astonishing A$2.4 billion ($1.7 billion; €1.5 billion) bid?

All we know so far are the names of the directors associated with it – managing director Chris Craddock and chairman Tony Shepherd seemingly the principals involved – and the involvement of Goldman Sachs, which is providing A$3.2 billion in acquisition facilities, and Westbourne Capital, which has committed A$400 million of debt financing.

The directors nearly all have backgrounds in rail logistics and infrastructure, which is also Westbourne’s specialty, suggesting they view GrainCorp’s extensive rail and ports network as something of an infrastructure play, rather than pure agribusiness.

The offer of A$10.42 per share was made in November but only announced a fortnight ago by GrainCorp alongside a portfolio review, which has been ongoing for a while but was not mentioned in its annual report a few weeks ago.

While it is proving difficult to get any finer details from LTAP about the structure of its offer, reports in the Australian media have emerged that suggest involvement from insurance giant Allianz.

The suggestion is that Allianz would smooth out volatility in the firm’s grain handling operations by taking on weather risk, signing a contract that would require it to top up the company’s revenue in years of low volumes (like we are seeing in 2018 and are likely to see in 2019) but then share in the profits in good years.

The theory goes that this would smooth out the ups and downs traditionally associated with agricultural investment and turn GrainCorp into an investment-grade proposition, allowing LTAP to refinance the debt they’ve secured from Goldman Sachs and Westbourne Capital should the transaction succeed.

But none of this has been officially confirmed, with LTAP keeping its cards very close to its chest – the suggestion being it sees the structure as so unique that it could represent intellectual property.

It’s also unclear how much equity is involved, if any, with sources familiar with the deal contacted by Agri Investor unwilling to disclose anything about its structure or its backers. Sources inside GrainCorp last week also said the finer points of the deal were unclear to them.

Beyond all this mystery, though, there are fundamental questions about whether GrainCorp is really the right target for this sort of takeover. The company’s grain-handling business has dragged down profits this year because of the drought, but there are some other fundamental issues that could affect its long-term value.

GrainCorp’s origins are as a New South Wales public-sector agency known as the Grain Elevators Board, dating back to the first half of the 20th century. That agency would transport grain around the state from local collection points via rail.

Essentially, the grain-handling business still does this, albeit using more modern methods and over a wider area in other states.

This is a business ripe for technological disruption, as is being proved by several start-ups including Clear Grain Exchange and others, which are connecting buyers and sellers directly without the middleman of GrainCorp, with more flexible market times and, in theory, better prices for sellers.

Farmers are also investing more in on-farm storage, diluting the need for GrainCorp’s bulk handling capabilities – and it’s a trend that is only likely to continue as other advances in technology make this easier and more economically viable.

But LTAP is betting the farm on its intriguing structure, believing it has found a way to truly remove the volatility from investing in agriculture to create an investment-grade agribusiness.

While it may currently be shrouded in mystery, before long LTAP will be forced to reveal more about its proposals, not least to GrainCorp shareholders, if it wants to get this complex deal over the line.

Write to the author at daniel.k@peimedia.com