2. Deal Description

This Chapter is divided into four sections. The first one describes the key events of the transaction. The second section examines the companies involved in the transaction while the third one analyzes the market in which these two companies operate. Based on this information, section 2.4 then evaluates whether the takeover made sense from a strategic point of view.

2.1 Timeline of Events

After a series of large acquisitions in the grain trading industry in early 2012, i.e. Glencore’s CAD 6.1 bn takeover of Viterra (FT 20.03.2012a) and Marubeni’s acquisition of Gavilon for USD 3.6 bn (WSJ Online, 29.05.2012), GrainCorp was first named as a potential takeover target by the press in March 2012 (FT 20.03.2012b). ADM started buying GrainCorp stocks in June 2012 via a cash settled total return swap until it reached an ownership stake of 4.9%, the maximum allowed without the obligation to declare itself as a substantial shareholder (Financial Review, 04.12.2012). This approach enabled it to conceal its intention to investors by bypassing the Hart-Scott-Rodino anti-trust provision of the U.S. Department of Justice (DOJ), which requires the approval to own more than USD 68.2 m worth of stock in another company (Federal Trade Commission 2012). On the night before the 19 October 2012, ADM managed to buy an additional 10% of the share capital in a private block trade with two of GrainCorp’s largest shareholders, Ellerston Capital and AMP, for AUD 11.75 per share (ADM 2012a). As a result of ADM’s disclosure of its 14.9% stake, GrainCorp requested a trading halt until 23 October 2012, which was granted by the ASX, but only for one day (GrainCorp 2012a). On Monday, 22 October, ADM approached GrainCorp’s board with an unsolicited offer of AUD 11.75 per share, which represented a 33% premium over the last closing price of AUD 8.85 (Financial Review, 29.11.2013).

ADM’s strategy to buy a toehold in the company served two major purposes. First, it reduced the free-rider problem with atomistic shareholders (Shleifer and Vishny 1986), and second, it reduced the probability of a bidding war, as other companies supposedly were also interested in GrainCorp (J.P. Morgan 2012). On 15 November, GrainCorp’s board rejected the offer, stating that it “materially undervalues GrainCorp” (GrainCorp 2012b). After an approval from the FIRB, ADM then further increased its stake in GrainCorp to 19.9% in the evening of 3 December (ADM 2012b). This stake effectively blocked the prospect of a scheme of arrangement or a full takeover from a second bidder (Financial Review 04.12.2012). On the next day, ADM made an improved non-binding offer at AUD 12.20 per share (ADM 2012b). This offer was also rejected by GrainCorp’s board on 13 December, arguing that the offer still materially undervalued the company (GrainCorp 2012c).

This rejection lead to a discussion between different shareholder groups of GrainCorp. Ashok Jacob, head of institutional investor Ellerston Capital, condemned the Board’s decision, arguing that shareholders should have the final say on the takeover. As a result, Ellerston sold its remaining stake in GrainCorp (FarmOnline 17.12.2012). On the other hand, GrainCorp’s largest individual shareholder, Don Seaton, was strictly against any takeover by a foreign entity. As former owner of Gardner Smith, he only became a shareholder after the completion of the takeover of the company by GrainCorp on 2 October 2012, stating that he would not have sold his firm to GrainCorp had he known of the transaction with ADM before (The Sydney Morning Herald 05.10.2013). The concerns about foreign control of key Australian infrastructure assets was also fiercely discussed in public, especially local east coast farmers and members of the National Party of Australia were strictly opposed to the transaction.

On 26 April 2013, GrainCorp and ADM entered into a takeover implementation deed under which ADM would make an off-market takeover offer of AUD 13.20 per share, under the condition of a successfully completed confirmatory due diligence (GrainCorp 2013a). In case the bid proceeded, all GrainCorp board members committed to recommend the offer on the condition that an independent third party determined that the offer price was fair, that all regulatory conditions had been satisfied until 31 December 2013, and that there was no superior offer. The consideration consisted of AUD 12.20 per share in cash and a special fully franked dividend by GrainCorp of AUD 1.00 to be paid before the completion of the transaction. By shifting some part of the consideration to a special fully franked dividend, ADM was able to increase the value of the bid to domestic shareholders beyond the AUD 13.20 without the need to pay more, as these domestic investors receive franking credits from the full dividend imputation tax system that they can use to offset personal income tax liabilities. The offer price represented a 49% premium over the last trading price prior to the initial proposal. Additionally, shareholders would receive an extra dividend of 3.5 cents for each month after 1 October 2013 during which the regulatory approvals would not have been achieved (GrainCorp 2013a). After successfully finishing the due diligence on 2 May 2013, ADM announced its offer of AUD 13.20 per share, subject to a minimal acceptance rate of 50.1%, all necessary regulatory approvals, and no prescribed occurrences (GrainCorp 2013b). After the fairness opinion yielded a positive result, GrainCorp’s board formally recommended ADM’s offer to its shareholders on 24 June 2013 (GrainCorp 2013c).

Three days later, the Australian Competition and Consumer Commission (ACCC) approved the transaction, stating that the takeover “was unlikely to result in a substantial lessening of competition in any market” (ACCC 2013). However, public sentiment about the transaction worsened over time and a Senate committee even recommended to the ACCC to reopen its probe (Financial Review 29.11.2013). After the victory of the center-right coalition, including the National Party that opposed the transaction, in the general election on 7 September 2013, the new Treasurer Joe Hockey, who presided over the FIRB, announced that the decision about GrainCorp would be delayed due to the size and complexity of the transaction (Financial Review 29.11.2013). In a last try to convince both farmers and the FIRB of the takeover, ADM announced a package of enhanced commitments, including additional capital expenditure of AUD 200 m, price caps on grain handling charges, guaranteed access for growers and third parties to all infrastructure, including ports, as well as the establishment of a grower and community advisory board (ADM 2013b).

However, these commitments were not enough, as three days later, on 29 November 2013, Treasurer Hockey declared that he prohibited the transaction on the basis of the Foreign Acquisitions and Takeovers Act of 1975 due to national interest reasons, but he left the door open for a 24.9% interest in GrainCorp (Hockey 2013). He stated growers’ concerns about reduced competition and the risk of undermining public support for foreign investments as his main arguments. However, by looking at the economic facts, it becomes clear that this was a pure political decision. As the ACCC (2013) stated, GrainCorp and ADM did not have significant horizontal overlaps in their operations. Hence, a merger could not have increased the market power of the combined firm and reduced competition. Furthermore, the access to GrainCorp’s port terminals had already been regulated by the ACCC, which would have continued to be the case after the transaction. Therefore, the fear of the opponents seemed to be unfounded (for a summary of the events, see Appendix 1).

Figure 1 shows the impact of the events discussed above on the implied success probability of the takeover.[1] The fact that p > 100% until mid-March of 2013 illustrates that the market expected a higher offer by ADM or a third party and therefore, the shares traded above the bid price. Moreover, the success probability is steadily decreasing as the market’s skepticism about a completion was increasing with time. However, it is surprising that until one week before the rejection of the takeover, the market still expected the transaction to be completed with a probability of approximately 80%. This optimistic view is supported by equity research analysts’ opinion that a rejection by the FIRB would be highly unlikely, as similar transactions in the past, such as the ABB Viterra and the AWB Agrium takeovers, had all been approved (J.P. Morgan 2013).

Figure 1: Implied Success Probability of the Transaction

2.2 Company Analysis

To provide a better understanding of the proposed transaction, this section analyzes the two companies involved in the takeover. Chapter 2.2.1 gives an overview over the target, GrainCorp, and chapter 2.2.2 covers ADM, the bidder.

2.2.1 GrainCorp

GrainCorp was founded in 1916 as a statutory authority by New South Wale’s Department of Agriculture under the name Grain Elevators Board (GrainCorp 2014a). In 1989, the company incorporated under the name NSW Grain Corporation and three years later, it was privatized via a sale to...