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December 13, 2012 11:17 am
Ever felt like someone you’re dating is messing you around? Archer Daniels Midland’s 19.9 per cent stake in GrainCorp and its takeover offer would seem a solid statement of intent towards the Australian grain handler. On the other hand, the small increase it made last week to its original offer made it look less than fully committed.
GrainCorp is playing hard to get. On Thursday, the company rejected ADM’s A$12.20, or A$2.8bn, bid, which was a 4 per cent improvement on its original offer. The shares have traded up to at least A$12.30 since the revised bid was made. What next? ADM could of course pay up. Its current price values the company at about 8.5 times earnings before interest, tax, depreciation and amortisation. An A$13 offer would value GrainCorp at 9.5 times its ebitda over the cycle, smoothing out last year’s bumper harvest, according to Macquarie. That is roughly in line with prices paid in similar deals.
ADM risks a credit downgrade, depending on how the deal is financed. But the rating agencies’ warnings come with caveats, and ADM has plans to raise some cash through divestments. Or it could play the long game. It has a record of long-term minority investments, although investors might like to ask what its A$500m outlay so far is getting them. But its one-fifth stake and its low offer do not preclude a rival bidder. The longer it takes for one to emerge, however, the less likely one becomes since Australia’s “creep” rules allow ADM to raise its holding by 3 per cent every six months without triggering a full bid.
ADM would profit itself if a higher bidder emerges but it does seem to want a deal, if not one at any price. Discipline is good, but it has space to raise its price if it really wants the business. Sometimes you’ve got to ask whether you’d like your date seeing others. If you don’t, either commit properly or walk away.
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