Last week, Archer-Daniels-Midland (ADM) increased its stake in GrainCorp, Australia's largest grain handler, by 10 percent and now controls 14.9 percent of the company. This move was clearly another large step towards an orderly acquisition, and particularly to expand its agricultural assets in a manner that will best gain share and capitalize off of growing demand in Asia. Now, ADM has made a $2.8 billion cash offer for GrainCorp.
The deal valued GrainCorp at about 15 percent of ADM's current market value. ADM's takeover bid is also a 33 percent premium to GrainCorp's prior price and roughly in line with the price ADM just paid for the 10 percent it just acquired. "The GrainCorp board is reviewing the proposal and has not yet formed a view on its merits and will keep the market informed of any material developments," GrainCorp commented. GrainCorp is being advised by investment banks Credit Suisse (CS) and Greenhill & Company (GHL), and law firm Gilbert & Tobin.
Nonetheless, the market has already spoken, with GrainCorp shares appreciating by about 37 percent, or roughly four percent more than the takeover bid. This level of appreciation indicates that the market believes this offer is too low. The fact that the price is in line with the rate ADM paid to acquire ten percent of GrainCorp just last week also appears to indicate that such a price is a bare minimum offer, and may require some sweetening in order to gain board approval, in addition to shareholder approval.
International growth is of growing importance to ADM, which currently makes just under half of its revenue internationally, according upon its latest annual report. GrainCorp appears to be a sensible acquisition target for ADM, because it is a market leader that is well positioned to service growing global demand for food. The company handles around 60 percent of the grain crop produced in eastern Australia, and operates multiple east Australian ports that ship grain in bulk, according to GrainCorp. GrainCorp is also the largest publicly traded crop handler in Australia.
Beyond its position in GrainCorp, ADM also has a presence in Australia through its 80% stake in grain handler Toepfer International, and may later combine its interests in these Australian businesses into a single subsidiary. Other potential buyers of GrainCorp would likely include Bunge (BG), Glencore and Wilmar. It is possible that some competitor might either announce a competing offer or voice concern over ADM's growth. Similarly, ADM may be forced to marginally increase its bid if any opposition is seen, including by GrainCorp's board, though such is no certainty. Again, share pricing indicates that the market anticipates either competition or ADM to increase the offer.
ADM has underperformed the broader market in 2012, and is now roughly even with its 2012 starting price. ADM declined during the second quarter, as news of significant droughts caused grain prices to spike, but the company and most of its peers have outperformed the market through the last few months. Since bottoming out at the start of August, ADM has appreciated by about 11 percent versus about 4.2 percent by the S&P 500 (SPY), of which it is a member.
ADM is also a member of the Dividend Aristocrats, and has increased its dividend every year for more than three decades. The company has not yet changed its dividend in 2012, indicating that a dividend increase announcement before the end of the year is reasonably likely. Moreover, ADM has announced a dividend increase during the first week of November for several consecutive years. This year is unlikely to be different. Investors will likely receive more information from ADM about both the company's dividend and the GrainCorp bid within the next few weeks.
Disclosure: I am long ADM.