Ann: Merger Announcement , page-8

Former monopolist AWB scratches around for a 35% share
July 31, 2010

Malcolm Maiden

YOU could call the GrainCorp-AWB merger one for the patriots.

AWB didn't pay a formal financial penalty after being carpeted by the Coles inquiry over its payment of bribes to secure wheat sales to Iraq before Saddam Hussein's downfall, but the real cost - the loss of its monopoly over Australian wheat exports - was enormous.

Announced by the Howard government in the wake of the Coles report, the deregulation of the export market began at the end of June 2008: since then, two dozen other exporters have been registered - the global giants including Cargill of the US, Swiss-based Glencore and Louis Dreyfus of France are all active here - and AWB's share of the export market has slumped from 100 per cent to 25 per cent.

Now, the 10 per cent export market share that GrainCorp has carved out is to be recombined with AWB's share in a merged group that AWB chairman Peter Polson said yesterday just might become Australia's ''agri-sector champion''.

The merger plans trump another deal AWB was negotiating that showed how far AWB's fortunes had fallen.

Discussions that were first disclosed in March revolved around Omaha-based agricultural commodity trader Gavilon buying AWB's international grain trading business, and taking half of AWB's domestic commodities business. Payment plus debt in the vehicles equated to an enterprise value of about $270 million, which was basically net asset value.

A second overseas commodity trader, Glencore, put its hand up as a potential buyer of the same assets last month after AWB's talks with Gavilon became non-exclusive. But in both cases, AWB would have sold cheaply and been left with only one wholly owned business of substance, its Landmark network of rural service outlets and, probably, a short life before Landmark was also taken over.

Talks with GrainCorp about a whole-of-company merger also began after Gavilon's exclusive negotiating window closed, and were initiated by a call from GrainCorp's acting managing direct, Ian Wilton, to AWB managing director Gordon Davis.

Incoming GrainCorp managing director Alison Watkins logged her first day officially yesterday, but also worked on the deal after cutting short a break she had been taking after departing as chief executive of the Bennelong investment group.

GrainCorp and AWB began the talks with a good working knowledge of each other's strengths and weaknesses, and Watkins's arrival created a new personal nexus: AWB chairman Peter Polson is also a

non-executive director of Bennelong.

The scheme-of-arrangement merger the two groups have announced is nominally a

nil-premium one but the terms, one GrainCorp share for every 5.75 AWB shares, gives GrainCorp shareholders 58 per cent of the merged company, and GrainCorp's seniority will in time be evident, even though the key board and executive slots are being shared at the outset. AWB chairman Polson is to take the chair of the merged group and Watkins will take over as managing director.

For AWB shareholders this is nevertheless a logical and promising union, and it probably overshadowed the more limited asset sale and joint venture with the overseas commodity houses as soon as it appeared on the horizon, despite the fact that the other talks were technically alive until AWB and GrainCorp signed their merger implementation deed, and then announced the deal.

Head offices and other operational overlaps will be eliminated, creating annual savings of $40 million a year that will flow to the profit line: that is a significant merger benefit given that AWB as a stand-alone expects earnings of $75 million to $95 million in the year to September (it downgraded guidance to that level yesterday, from earlier guidance of $85 million to $110 million), and GrainCorp expects earnings of $75 million to $90 million in the same financial year (it maintained its profit guidance yesterday).

The marriage as mentioned creates an Australian group that begins life controlling about 35 per cent of Australia's what export trade, with the economies of scale and marketing presence that come with a footprint of that size. One of the ironies of this deal is that while AWB's escapades in Iraq led to it losing its monopoly and being weakened to the point that it needed a transforming deal, its continuing strong relationship with Middle-Eastern countries - some of which are among Australia's largest wheat customers - is one of the big intangible benefits of the merger for GrainCorp.

The union also creates a more diverse revenue stream for both groups - as AWB injects its Landmark business into the mix, and as GrainCorp delivers its 60 per cent share of the Allied Mills flour-milling joint venture with US-based Cargill, and also delivers the world's fourth-largest malt producing business, pulled together with the $757 million acquisition of United Malt Holdings in November last year. United Malt owns the Barrett Burston malt business in Australia.

The other big local malt producer is Joe White Maltings, a subsidiary of ABB Grain, which was itself acquired by another overseas plater, Canadian agricultural combine Viterra, in September last year.

As to whether the AWB-GrainCorp marriage creates a locally owned global champion, it will not be easy. But the merged group has a chance. The deregulation of the wheat market has introduced fierce competition, but agriculture is a core Australian competency, like mining. We have the resources and the skills to be very good at this global game.