GrainCorp’s (GNC) share price was trashed this morning – down by nearly 30% in pre trading, slashing the company’s value by around $900 million, based on the ADM takeover price of $13.20 a share.
Trading didn’t start at 10 am – it was delayed until 11.40 am after the Hockey decision was announced just after 8 am. But the pre market had a buying quote of $7.90, indicating a fall of at least 29% at the start, and probably more as hedge funds quit the stock.
But in reality, the GrainCorp share price has been slowing weakening for three months – since early September when it looked certain the Opposition would win the election, and throw the fate of the bid into doubt. Which is what happened on September 7 and the rural socialists of the National party eventually got their way.
The negative decision on the $3.4 billion bid for the company helped knock the wider market lower and it spent most of the morning drifting lower, in the absence of any lead from the US because of the Thanksgiving holiday.
With a half holiday tonight in the US, don’t expect any further help and big investors offshore will have noted the high profile ‘no’ to foreign investment and put Australia and this government on a watch list for a while.
The slow fall in the GrainCorp share price would have put the company on alert, but clearly the decision wasn’t expected, although was there an inkling that Joe Hockey would be saying ‘no’ the last minute PR blitz staged this morning by senior officials of the company.
Chairman Don Taylor gave an ‘exclusive’ story to The Australian Financial Review this morning warning of the damage rejection could do – and criticised grain growers for opposing the ADM offer. And CEO, the highly regarded Alison Watkins went on Radio National this morning and made similar comments.
But their warnings fell on deaf ears as Joe Hockey announced his decision just after 8am, while readers and listeners were still digesting the media reports.
And Mr Taylor’s warnings were significant – around $US250 million of investment at risk, plus other spending planned by GrainCorp itself would be reviewed. GrainCorp will find its cost of raising new debt and capital will rise because allowing ADM to build its stake to a maximum of 24.9% is a weak second prize to total control.
ADM will still be GrainCorp’s biggest shareholder. The extra $US250 million in planned investment from ADM was on top of a similar amount planned by GrainCorp. That is now in doubt and will further impact hopes the Reserve Bank has for an expansion of non-mining investment in the next couple of years.
Because it is a smaller company without ADM, GrainCorp will now have to reduce the planned outlay from the half a billion dollars planned after the takeover. The fall in the share price will make raising fresh capital more expensive as well.
So what’s initial take from the decision?
Well, the new government is not very convincing or confident in making tough decisions, so don’t expect any really big decisions on tax, spending and cuts in the next couple of years. It just doesn’t want to risk alienating voters.
Mr Hockey’s decision either means Australia is ‘open for business’ in a very different way to that commonly thought after Prime MInister Abbott uttered the words in his victory speech in Sydney on election night.
Or the decision is Mr Hockey’s ‘Woodside" moment – to recall the controversial rejection of Shell’s $10 billion takeover offer for Woodside Petroleum back in 2001 by then Treasurer, Peter Costello.
That generated a lot of talk about the adverse impact on foreign investment, but the truth is, it had no impact whatsoever – the $600 billion plus invested in the LNG, coal, iron ore and myriad other industries since since 2001, is testimony to the lack of any impact, or sovereign risk.
The AMP’s Dr Shane Oliver reckoned this morning it won’t have much long term impact. He said the GrainCorp decision was made on political, not economic or policy grounds.
But that is also why it is a poor decision, from the market’s point of view.
Shell has even invested more than $US20 billion in LNG projects in WA and Queensland since 2001, which is a lot more than what it would have spent on buying Woodside, which in itself has prospered and is now moving offshore after investing heavily (with partners) in WA LNG.
The only groups impacted by the Shell rejection was Shell and Woodside’s shareholders – at best 20,000 people. Contrast that to the widespread opposition to the ADM deal among grain farmers in Eastern Australia (but not in WA or South Australia), and among the National Party.
The Costello decision didn’t upset anyone in the Howard Government other than a small group of believers in free markets. They still exist inside the Liberal Party today, but in name only. This is a big win for Nationals leader, Warren Truss and his deputy Barnaby Joyce. That have won big over the Liberals and now wag the larger party’s tail.
The strong and very public opposition to the Graincorp deal from the National Party, was always going to weigh heavily on the decision and they ended up winning. There were also a group of rural Liberals, led by Senator Bill Heffernan, who lead the opposition as well.
But they can’t deny that deregulation has been good for the rural sector – witness the increasingly expensive bidding war for Warrnambool dairy products company – that would not have happened before deregulation 12 years or so ago.
It is also intriguing that that very expensive, half a billion dollars – plus war, hasn’t gotten the same opposition from the Nationals as the Grain Corp bid.
Plenty of investors local and foreign have invested in Australian agriculture over the decades and have lost heavily or done poorly and are no longer involved – the AMP in cattle comes to mind.
But a lot more have invested in sectors such as dairying, which China wants more of, as well as sugar, beef, cotton, oilseeds and others. Will Indonesia really invest in northern Australia beef now?
