Terry at Saturday Salon has raised the issue of Treaurer Hockey’s decision to disallow the US company Archer Daniels Midland’s (ADM) A$3.4 billion 100% takeover bid for the Australian company GrainCorp. As Terry said, Judith Sloan went ballistic, Bernard Keane and Glenn Dyer were scathing at Crikey, as was Geoff Kitney at the AFR.
For a straightforward account of what happened, try Michelle Grattan at The Conversation. She does call GrainCorp an agri-giant, although it’s not a large company in Australian terms, may just rate as a ‘mid-cap’. In American terms it’s a tiddler. Nevertheless it would have been ADM’s biggest acquisition to date. ADM is worth about $US27 billion. Graincorp after the post-bid price fall in now worth about $A2 billion.
There are at least three reasons why the bid was rejected.
First, there is a lack of competition in the eastern seaboard grain handling market. Graincorp owns 7 out of 10 terminals and handles some 85% of the grain. From Grattan:
“Many industry participants, particularly growers in eastern Australia, have expressed concern that the proposed acquisition could reduce competition and impede growers’ ability to access the grain storage, logistics and distribution network,” he [Hockey] said
Given the transition to a more competitive network was still emerging, “now is not the right time for a 100% foreign acquisition of this key Australian business.”
A “further significant consideration” was that the proposal had attracted a high level of concern from stakeholders and the broader community.
Allowing the bid to proceed “could risk undermining public support for the foreign investment regime and ongoing foreign investment more generally”.
Thirdly, and down-pedalled somewhat, there were issues about ADM’s motivation and longer-term priorities and its record of providing service in its home market, in other words, questions of character. The sweetener of $200 million for additional investment and promised price caps for handling fees was too late to be persuasive. In any case there was no guarantee that farmers would not pay in the long run.
The suspicion was that ADM saw the takeover primarily as a means of giving it a vehicle into Asia, rather than because of an interest in the Australian market. In the future ADM would invest wherever it could make the largest returns and that may not be Australia.
Graincorp, formed from the old government-owned Grain Handling Authority, was part of the deregulation of the wheat market and the dismantling of the government single-desk selling arrangement in 2008.
Single-desk selling used to drive the world’s capitalist free-traders mad. The Americans in particular saw it as inherently evil and a form of subsidy. On the other hand many local farmers saw deregulation and privatisation as a backward step. Their fears appear to have been realised in that handling costs, they claim, have risen by as much as 40 to 50%. There have also been service difficulties and the neglect of infrastructure.
Tingle observes that in this decision, as with Woodside (Costello) and the ASX (Swan), the withdrawal of the main players from the public discussion has meant that the decision appears to be based on political or ideological grounds. The real issues are lost in the general noise.
So Hockey is seen as caving in to the xenophobic Nats.
What this masks is that the noisy Nats are possibly more aware than most of the first and third reasons given above.
In this case they’ve been joined by The Greens and Palmer. Katter too, I’m sure, if anyone bothered to ask him these days. Nick Xenophon says Hockey’s decision “was a win for Australian grain producers and for Australia’s foreign investment strategy.”
Nevertheless the public display of disunity in Government ranks has been unedifying, with Nationals leaders such as Joyce and Truss virtually in open revolt, supported by rural Liberals such as Bill Heffernan.
Hockey said he wouldn’t be bullied. It was revealed on Counterpoint that he was perhaps referring to overseas investment banks who apparently got at him when he was in New York. There is little doubt, however, that the internal polilics were significant. Hockey is now seen as a figure who can be rolled.
Meanwhile the problems in the grain market are unresolved as Tingle and Mike Smith and his Chanticleer column in the AFR point out. The share price has returned to pre-takeover levels and will probably go down further as the opportunists realise the games up and sell out. A smaller market cap can affect capital raising capacity, but what’s required should not be beyond Graincorp if those parts of the enterprise are actually profitable.
I’ve just heard that the CEO has resigned. This should bring new thinking to the group.
For mine the big mistake was made back in 2008. Farmer are generally price takers and are susceptible to being squeezed by monopoly interests at both ends. Grain handling and marketing in a place like the eastern states of Australia seems to me best handled by the stakeholders, which are the farmers and us, rather than capitalists beholden to shareholders whether domestic or foreign. But it is now probably not possible to go back to some combo of farmer/public ownership and control. Next best is a private company that lives or dies on its performance within the home market.
My other bugbear is our obsession with competition, which is often not sensible in a small market. For example, we built eight oil refineries. Singapore built one, knowing that the true competition would be with the rest of the world. Guess which model looks like surviving into the future?