Lingering doubts over long-term structure of GrainCorp bid

GrainCorp is now in play at a fancy price but what the market really wants to know is who’s backing the bid.

GrainCorp’s terminal at Corio. Picture: Yuri Kouzmin

On paper GrainCorp chair Graham Bradley should tell his shareholders to take the Long-Term Asset Partners cash and run but there are lingering doubts about this bid and just how it will be structured over the long term.

Short-term funding is fine, with $3.2 billion in three-year money from Goldman Sachs and $400 million from Werstbourne but it's the next step that has people scratching their heads.

All Chris Craddock, the brains behind LTAP, will say is it hinges around the fact he has a structure which attracts a debt rating which is a step better than GrainCorp with no debt rating.

The bid, at $10.42 a share, has an equity value of $2.4bn, with another $400m in long term debt and then short term financing to cover grain inventories totalling $1.4bn.

Craddock is not widely known but is in his mid 40s and his career includes stints at Deutsche and Bell Asset Management.

A mutual friend introduced him to former Transfield boss Tony Shepherd three years ago and then Shepherd put together some luminaries including former Aurizon boss Lance Hockridge and board member Andrea Staines.

What the market would like to know is who is putting up the funds to support this bid.

There is presumably equity coming from someone which isn’t sitting in a drawer at LTAP right now.

At 15 times earnings, the bid is attractive, even though it is below the $13.20 bid by international giant ADM five years ago.

That bid was famously rejected by the then Treasurer Joe Hockey on spurious national interest grounds which smacked of pure politics and concern by the National Party that one of its own was heading offshore.

GrainCorp is a key part of the east coast farm infrastructure with 13 bulk liquid terminals and seven train terminals.

It also has some saleable assets including its malt operations which could fetch $1bn and it oils arm could fetch around $600m.

Right now, LTAP says nothing is up for sale which is surprising for a highly leveraged bid.

Its selling point is control of farm infrastructure in a structure which can cope with the farm cycle.

As a local company it is not subject to the vagaries of an inconsistent and illogical foreign investment review regime.

The bid, which is said to have been under consideration for more than two years is timed to hit the bottom of the cycle (GNC) with the stock at $7.79 compared to its five-year high of $10.32 in June last year.

A poor grain harvest last year is the reason for the cyclical low.

The bid was first put to Bradley on November 12, but was only disclosed today because the board decided last night to grant due diligence.

At the same time, Bradley has flagged potential asset sales which offer some form of competition and at the very least underline there are assets worth selling which could make a higher bid easier to finance.

GrainCorp is now in play at a fancy price. It remains to be seen whether a rival bid emerges.