Market in the dark as Graham Bradley puts GrainCorp in play

The market in GrainCorp shares is uninformed because of the lack of details behind the proposed $2.4bn equity bid.

GrainCorp chairman Graham Bradley. Illustration: Sturt Krygsman

The market in GrainCorp shares is fundamentally uninformed because of the lack of details behind the proposed $2.4 billion equity bid for the company.

Confirmation from GrainCorp chairman Graham Bradley that he had granted due diligence to Long-Term Asset Partners (LTAP) to consider a $10.42-a-share bid sent the stock price up 27 per cent to $9.25.

The move effectively put GrainCorp into play and Bradley also cleverly confirmed his chief Mark Palmquist was reviewing his assets, which raised the prospect of asset sales to help finance rival bids.

Bradley presumably satisfied himself that the deal should get to square one because he has had the proposal since November 12 — but on what basis was not made clear yesterday, and as a vehicle LTAP is unheard of around the market, outside the insiders who declined to answer calls yesterday.

The reality is, apart from knowing the cash bid will be covered by Goldman Sachs’s $3.2bn bridge loan, no one knows how the bid will be financed in the longer term.

There is more than a touch of the wacky on the deal terms known so far and until more details are provided it can be classed as bizarre.

It is, after all, the season of wonder and joy. The proposed deal will be by way of a scheme of arrangement, subject to due diligence, which like private equity bids means a deal is by no means certain until LTAP can firm up its bank debt.

It is understood to be based around an insurance contract that effectively hedges the potential variations in grain harvests, and in turn provides the company with a debt rating and hence the ability to increase its leverage.

The debt rating will be investment grade, but just who will provide it is not known. And just who will provide equity was not made clear yesterday, nor were the terms of the securitisation deal, which will be the bid’s bedrock.

In the absence of information to the contrary, the suspicion is LTAP has little by way of equity and is unwilling to disclose more detail now, to allegedly both protect its intellectual property and keep the market guessing.

GrainCorp has been in the game for more than 100 years, so one might think it has once tried the same insurance hedge contracts the Craddock brothers have shopped around the market in recent years.

The company’s two biggest shareholders, Ellerston and Perpetual, are reportedly backing the bid, but this means they want to sell out — or perhaps even get a higher offer, after then treasurer Joe Hockey squashed a higher bid five years ago from US giant ADM on spurious national interest grounds.

Nationals leader Michael ­McCormack led the cry for more details yesterday in his Twitter comment on the deal, suggesting that while FIRB won’t be a player, the politicians are watching this one.

The $400 million in backing from Westbourne Capital will presumably form some sort of long-term base, but Westbourne directors contacted yesterday said they had few details of the deal and chief David Ridley declined to return several phone calls.

The brains of the proposed bid, Chris Craddock, was also unwilling to detail the proposal and his usually garrulous chairman Tony Shepherd refused to even name the mutual friend who had introduced the two a few years ago.

Shepherd was clearly responsible for bringing former Aurizon boss Lance Hockridge and one of Hockridge’s directors, Andrea Staines, on board.

One argument says Goldman Sachs is providing the capital to pay shareholders $10.42 a share, so who cares what the long-term financing arrangements are.

Customers care and as the key infrastructure provider for grain trading on the east coast, the country also cares, as do joint-­venture partners.

GrainCorp has 13 bulk liquid terminals and seven grain terminals, which have struggled at times because high charges a few years ago meant more farms stored their own grain.

It also has some saleable assets, including its malt operations that could fetch well north of $1bn, and its oils arm, which could fetch in excess of $600 million.

The malt business ranks fourth in the world and Cargill now has its third-ranked malt business on the blocks, which provides a potential deal opening.

Craddock and his brother Nick have in recent years banged on the door of anyone who would listen to flog a proposal in which an insurance contract would be used to hedge the volatility of farm produce due to weather moves. By supposedly taking out the risk they would make the company’s earnings a better bankable product, which in turn would allow more leverage.

GrainCorp’s debt is not rated and Craddock is selling his bid on a plan to provide a certain debt grade for the company. The table shows this volatility, but GrainCorp has diversified into malt and oils in recent years to provide continuity.

Wheat crops and Graincorp profits

There is an argument that says farm commodities are not suitable for the public equity market, but while short reporting cycles don’t help, running the company well has proved a good response.

Loan returns halve

Last week ANZ chief Shayne ­Elliott confided that return on ­equity on home loans has halved in recent years, from more than 30 per cent to below 15 per cent — which he put in the context of why there was a push to maximise home loans in the early years.

Given the profit pool is lower now, there is less incentive to bend the rules.

UBS figures yesterday noting that housing growth in October was the lowest since 1976 is another dampener, because clearly housing credit growth is slowing to zero.

Later this month, the Australian Prudential Regulation Authority will release its final round of risk weightings on mortgages, which will increase the amount of capital to be held against interest-only loans, and overall risk weightings will edge up from 25 per cent for the big banks.

The smaller banks, which don’t have advanced accreditation status, originally wanted the playing field levelled by cutting risk weightings, which would make it easier for them as they now are ­required to keep 35 per cent ­capital.

Instead, the regulators have narrowed the gap but only by increasing the capital weights, which makes loans more expensive and arguably safer.

The combination now comes as the housing market is slowing fast.

Digital report doubts

The ACCC draft report on digital platforms was handed to Josh Frydenberg late yesterday, leaving some doubt as to its eventual release date.

The document is intended as a discussion paper to provoke ideas rather than present definitive conclusions, which should mean an early release.

Ridgeway to step aside

One of the senior members of the Trade Practices mafia, Stephen Ridgeway, will step aside from his role as a partner at King & Wood Mallesons this month to embark on a new career at the bar.

Ridgeway has had a long experience at the Australian Government Solicitor, Blake Dawson Waldron, and now Mallesons.