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GrainCorp share price surges on $2.4bn buyout bid

Emma Rapaport  |  03 Dec 2018Text size  Decrease  Increase  |  
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The unexpected bid from Long-Term Asset Partners builds in a considerable share price premium to Graincorp's current price but investors should be in no hurry, says Morningstar.

GrainCorp (ASX: GNC) shares surged by more than third after the drought-hit grain handler received an all-cash $2.38 billion takeover bid from little-known asset manager Long-Term Asset Partners.

GrainCorp's board said on Monday it would engage with LTAP with regard to an ongoing portfolio review of the company, and also assess merits of the proposal, which involves a buyback of $10.42 per share.

wheat graincorp grain handler

Drought and higher energy costs shrivelled GrainCorp's full-year balance sheet in 2017/18

This is a view shared by Morningstar's director of equity research - Australasia, Adam Fleck. He hails the unexpected offer as largely positive, but suggests investors shouldn't be in a hurry to act.

Shares in the company skyrocketed as much as 34 per cent in early trade and were still up nearly 26.6 per cent at $9.26 by 10.45am Sydney time, setting a new two-and-a-half-year high.

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Fleck sees the willingness of a major Graincorp shareholder to "put money on the table" as a good thing.

He notes the LTAP bid is equivalent to $10.42 a share, a considerable premium to GrainCorp's trading price, which today opened at $7.32.

Morningstar's fair value for the business is $8.30.

Fleck foresees no likely problems if the deal is considered by the Foreign Investment Review Board, as the proposal has come from what appears to be an Australian group.

"Graincorp did have a $3.4 billion offer back in 2013-2014 from Archer Daniels Midland Co, but it was knocked back by FIRB and the treasurer, but this time, we don't think the FIRB will play a role," Fleck says.

While he notes Graincorp has struggled in more recent times, "over the long term, we think the business is set up to do better, and our outlook remains unchanged."

GrainCorp's board has yet to decide whether the price under the LTAP proposal warrants a recommendation to shareholders.

"The board considers that because the portfolio review is well progressed and the LTAP proposal is not sufficiently certain, it would not be in shareholders' interests for GrainCorp to suspend or terminate the other initiatives under assessment," the company said in a statement.

Management also noted the "complex financing structure" of the deal involving $3.2 billion in acquisition facilities from Goldman Sachs and $400 million from Westbourne Capital.

A drought-ravaged east coast cropping landscape and higher energy costs shrivelled GrainCorp's full-year balance sheet in 2017/18, with profit dropping 43.7 per cent to $70.5 million.

Last month GrainCorp cut about 50 jobs in middle management and administration on forecasts of a severely reduced summer harvest, with further cuts expected as a bleak 2019 looms.

While a rise in malt and oil revenue failed to offset a $380 million drop in grain earnings, GrainCorp told investors its review aimed to maximise the craft beer-fuelled global malt portfolio via consolidation or an ownership separation of assets.


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is the editorial manager for Morningstar Australia. Connect with Emma on Twitter @rap_reports. You can email Morningstar's editorial team editorialAU[at]morningstar[dot]com

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