This evening, ADM announced that it had signed a “takeover bid implementation deed” with GrainCorp to acquire the company for A$12.20 per share. Essentially, ADM will be conducting due diligence for a period of one week and at the end of that period, will make the determination as to whether or not to proceed with a bid. ADM has moved its quarterly reporting date to May 1st to accomodate the due dilligence timetable. GrainCorp has announced that any such bid would be unanimously supported by the Board. The total transaction value is A$3.4 billion including the debt at GrainCorp. For the fiscal year ended September 30, 2012, GrainCorp delivered adjusted EBITDA of A$413.9 million and $349.6 million in the year prior – so, approximately 8.2x trailing EV/EBITDA. ADM suggested that the transaction would be “cash accretive” in its first full year (so, EPS dilutive).
Our view is that this transaction makes a great deal of sense within the context of our long-term bullish call on global agricultural processing. We believe that one of the best ways to play the increase in caloric consumption of the emerging middle class in developing markets is through companies such as ADM and BG. ADM and BG are positioned to capitalize on the fundamental geographic mismatch that exists and will continue to grow between where crops are most efficiently produced and where the growth in consumption lies.
Further, we believe that ADM needs to expand beyond its core U.S. operations and the associated ethanol exposure. ADM missed out on Viterra, the largest grain processor in Canada when those assets went to Glencore. GrainCorp is the largest grain processor in Australia, a major wheat producer and exporter, well-positioned to feed the burgeoning middle classes of Asia and the Middle East.
These assets are unique and not easily replicated, if at all. While it is a very capital intensive business, the investment thesis behind ADM and BG is expanding returns over time on a growing asset base.
Bottom line, we are seeing consolidation in global agricultural assets and once the train leaves the station (ability to acquire assets in a particular country), there isn’t another one coming along. ADM hopped on a good train with GrainCorp – significant share in an attractive market that is well-positioned to exploit favorable trends in global consumption.
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