Deals

GrainCorp secures insurer deal to smooth out earnings volatility

The ASX-listed firm has signed a contract with White Rock Insurance in a similar arrangement to that proposed by Long-Term Asset Partners in its failed takeover bid for the company.

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GrainCorp has entered into a 10-year agreement with an insurer to help smooth out the volatility from earnings in Australia’s east coast grain market.

The ASX-listed firm made the announcement to the stock market on June 7, after flagging in April that it was in negotiations to secure an agreement.

The contract has been signed with White Rock Insurance, a subsidiary of Aon.

It takes effect from the start of the 2019-20 financial year on July 1. During the term of the contract, a fixed payment of A$15 ($10.46; €9.28) per tonne will be made by either GrainCorp or White Rock to the other, depending on the level of production.

If production falls below a threshold of 15.3 million tonnes, GrainCorp will receive the payments from White Rock up to an annual maximum of A$80 million.

If production is above the threshold, GrainCorp will make the payments to White Rock up to an annual maximum of A$70 million.

In both cases, the maximum production payments that can be made to either GrainCorp or White Rock will be A$270 million in total over the 10-year term.

The contract will not be subject to termination in the event of a change of control at GrainCorp, such as a buyout or takeover.

The agreement echoes one element of the proposed structure of Long-Term Asset Partners’ failed takeover bid for GrainCorp, which was withdrawn in May.

LTAP had offered A$10.42 per share to acquire 100 percent of GrainCorp, with the bid underpinned by an agreement with an “internationally recognised insurer” to provide a swap linked to grain volumes that would smooth out the volatility in the grain market on Australia’s east coast – a mirror of the agreement that GrainCorp has now signed with White Rock. The Australian media reported that the insurer LTAP had lined up was Allianz.

Australian Farm Institute executive director Richard Heath told Agri Investor last month that “every boardroom in the country” will have looked at the proposed GrainCorp insurance agreement and “wondered why they didn’t think of it already.”

GrainCorp CEO Mark Palmquist said: “The contract will smooth GrainCorp’s cashflow and allow for longer term capital allocation and business planning through the cycle.”