GrainCorp raises glass to a deal done on malt demerger

The malt operations of GrainCorp were in a new company called United Malt Group.

Amid a great deal of chaos and uncertainty in the markets, one deal that is set to complete this week is the demerger of the malt division from GrainCorp.

As of Monday, the malt operations of GrainCorp were in a new company called United Malt Group. Shares start trading on Tuesday with the code UMG, initially on a deferred settlement basis. It is anyone’s guess where they end up.

On one hand, GrainCorp is now in a far stronger position, with the drought somewhat over and rain this year promising a better crop than in the past two seasons. But it will be hard to gauge how the malt business will perform, at least in the short term.

GrainCorp’s malt division was previously seen as one of its most attractive assets, but now the question is how the Morrison government’s move to shut down pubs and hospitality venues to limit the spread of COVID-19 hits the business.

The demerger will be finalised on April 1 and GrainCorp shareholders will receive one share in United Malt Group for each GrainCorp share they hold.

GrainCorp’s equity value has fallen to $1.7bn from $2bn in February, but the pain it has suffered from the coronavirus pandemic is nothing compared to the hurt felt by other listed businesses.

The malt division was always considered a takeover target by private equity, but buyout funds no doubt have far too much on their minds to worry about it now.

The understanding is that GrainCorp was eager to secure a price of about $2bn for the malt business, but potential buyers were not prepared to pay that much.

United Malt is among the four largest malt businesses in the world, along with Cargill, Malteurop and France’s Boortmalt, backed by Temasek out of Singapore.

A challenge for private equity would be growing earnings in the malt business, given that analysts consider GrainCorp has done a good job in running the division.

The business is cyclical, and if it ramps up production and too much malt enters the market it could depress prices.

Malt contributed $176m in earnings before interest, tax, depreciation and amortisation to GrainCorp’s results for the 2019 financial year.

GrainCorp moved to separate its malt business and sell off other assets after it was subject to a takeover bid by Long Term Asset Partners for $2.4bn.

Other deals that are still supposedly forging ahead include the sale of Incitec Pivot’s fertilisers division through investment bank UBS.

The sales process is now in the second phase, and while suitors will be unable to complete physical due diligence due to travel restrictions, a divestment is yet to be called off.

A big question remains whether parties can secure funding for transactions.

Previously, it was expected that Incitec Pivot, which has seen its share price fall from its year’s high of $3.40 to about $1.66, wanted book value for the asset, which is about $800m, and if it did not achieve that price it would embark on a demerger.

Healius, meanwhile, is proceeding with the sale of its medical centres division through UBS and Morgan Stanley, with bids due this week.

A raft of private equity groups including BGH Capital were said to be looking at the assets, and the big test will be over whether they can secure funding.

It comes after Healius earlier rebuffed a $2.1bn takeover bid for the pathology, radiology and medical centre services provider by the European private equity company Partners Group. Its market value is now $1.47bn.