Deals and IPOs

Australia spurns ADM's $2.6 billion GrainCorp takeover, shares tumble

ADM to increase stake in Graincorp
ADM to increase stake in Graincorp

Australia rejected a A$2.8 billion ($2.55 billion) takeover of GrainCorp by U.S. agribusiness giant Archer Daniels Midland on Friday, bowing to pressure from grain growers in a rare and surprising decision.

GrainCorp shares plunged, losing a quarter of their value, as the rejection by Treasurer Joe Hockey effectively ring-fenced Australia's last major independent grains handler from any takeover.

The deal had been seen as the first test of the conservative government's vow that Australia was "open for business" after the victory of Prime Minister Tony Abbott in September elections.

(Read more: Australia's GrainCorp rejects ADM offer)

Hockey said he was rejecting the proposal on national interest grounds after Australia's Foreign Investment Review Board (FIRB) failed to reach a consensus recommendation.

"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," Hockey told reporters in Sydney.

The rejection is a blow to an attempt by ADM - which is more U.S.-focused than rivalsCargil, Bungeand Louis Dreyfus - to improve its access to fast-growing Asian markets.

(Read more: Australia to be 'odd one out' in 2014: Goldman)

"There is strategic importance to this industry," said Peter Mavromatis, chief investment officer and portfolio manager at Beulah Capital. "Australia, if it is indeed to become a food bowl to Asia... we'd like to keep control of quite significant assets in this area."

GrainCorp and ADM both expressed their disappointment with the decision.

"Australian agriculture has been prevented from realising the potential benefits from the significant capital ADM would have invested in the long term future of the industry," GrainCorp Chairman Don Taylor said.

GrainCorp shares slumped to a low of A$8.25, below its pre-bid level. The company has been diversifying its business, but earnings are under pressure from lower grains harvests.

"The problem now of course is the recent numbers from GrainCorp look pretty scary, so my feeling is a downside on GrainCorp is a lot lower than what it was trading at before this was announced, so really bad news for shareholders," said Shannon Rivkin, a director at Rivkin Securities.

(Read more: Australia's cheese war – the battle for Warrnambool)

Attractive assets

See 10% upside for Aussie stocks: Macquarie
See 10% upside for Aussie stocks: Macquarie

Australia is the world's second-largest wheat exporter and GrainCorp is the largest listed grains company, handling approximately one-third of the country's wheat production.

It dominates the country's east coast storage, distribution and marketing of grains, handling 85 percent of eastern Australia's exports.

The deal had previously been approved by Australia's competition regulator and analysts had expected it to proceed.

But it was unpopular with farmers and many voters and had stoked divisions between the Liberal Party and its junior partner, the rural-based National Party.

(Read more: Aussie dollar could tumble 25% by 2016, warns SocGen)

"All the way along we wanted ADM to show us how growers would benefit and no one could," said Dan Cooper, a farmer in New South Wales and committee chair at the NSW Farmers Federation.

Farmers were sceptical of another foreign deal in the grains industry after Canadian agribusiness Viterra in 2009 purchased ABB Grain, then Australia's largest agribusiness. Many South Australian farmers have complained about higher prices and long waiting times to deliver grain.

"The Viterra path was exactly the path we were heading down where growers were being squeezed by a monopoly," said Cooper.

Glencore Xstrata, which purchased Viterra in 2012, was not immediately available for comment.

(Read more: Drought 'likely' to continue this winter)

Only a handful of foreign investment deals are rejected by Australian authorities each year and ADM's tilt at GrainCorp is far from the first foreign deal in the agriculture sector.

Hockey said the deal was the only one of 131 significant foreign investment applications that had been rejected since he came to office. The last major foreign investment blocked wasSingapore Exchange $8 billion bid for ASX in 2011.

"People will interpret this as maybe Australia is not so 'open for business'," said Shane Oliver, head of investment strategy, AMP Capital Investors. "That is the way it will be interpreted, but I think it's a one off and will not set a precedent."

Hockey said he was open to ADM - one of the four "ABCD" firms that have dominated the global agricultural business for decades - increasing its stake in GrainCorp to nearly 25 percent. ADM said it would consider an increase.

The GrainCorp takeover was still awaiting approval from China, which this year imposed stiff conditions on Japanese trading house Marubeni's $5.6 billion purchase of U.S. grain merchant Gavilon amid anxiety over food security.

(Read more: Food safety scare prompts recall in China)

ADM's bid for GrainCorp is part of a wave of international interest in Australia's agricultural industry. Most recently Australia's Warrnambool Cheese and Butter Factory Company has sparked a bidding war involving Canada's Saputo, which has already won FIRB approval.

U.S. wheat has lost about a quarter of its value since ADM announced plans to buy GrainCorp in October last year. A rebound in global grain production is weighing on prices.

ADM was advised by Citi and Barclays , while Credit Suisse and Greenhill advised GrainCorp