INVESTORS in GrainCorp and AWB have been promised substantial...

INVESTORS in GrainCorp and AWB have been promised substantial synergies will flow from a planned $2 billion merger.

The merger would enable the bulked-up agribusiness group to better compete in the global market.

The boards of both companies have thrown their weight behind a merger deal in which GrainCorp will issue AWB shareholders with one share for every 5.75 AWB shares held, giving them a 42 per cent stake in the combined business.

The surprise merger, which was announced yesterday and has been welcomed by the market so far, came as AWB unexpectedly terminated long-running negotiations with US-based Gavilon over the sale of its Geneva trading business and half of its local commodities management arm.

AWB chairman Peter Polson described the GrainCorp merger as a "superior proposal".

Although the transaction is being promoted as a merger rather than a takeover, it will result in the wheat exporter becoming a subsidiary of the combined entity, which will initially trade under the name GrainCorp.

The group will be run by GrainCorp's incoming chief executive Alison Watkins, who was not due to start in the role until next month but has spent the past few weeks working behind the scenes on the transaction. AWB chairman Peter Polson will chair the board, while GrainCorp chairman Don Taylor will become deputy chairman.

AWB's current managing director, Gordon Davies, who has responsibility for promoting the deal to shareholders, whose support is crucial if the deal is to proceed, will not continue with the merged group.

Mr Polson said the merger would lead to the creation of one of Australia's largest agribusiness companies with greater reach in the increasingly competitive grain and malt markets.

"The business and geographic diversification that results from combining these two companies delivers a more stable earnings profile for shareholders, with the potential for increased revenues and reduced earnings risk across the group's operations," he said.

"The merger will deliver synergies in excess of $40m per annum. There are obvious benefits in merging the two head offices and by cutting duplication throughout the organisation."

AWB, which continues to deal with residual legal issues resulting from the Iraqi kickback scandal, also used the merger announcement to issue an earnings downgrade, revealing that pre-tax profit for the year was expected to be between $75m and $95m, compared with the $85m to $110m range previously forecast.

It is the group's second profit warning this year and came as a surprise to at least one broking house analyst, RBS Morgan's Belinda Moore, who claimed the company had reaffirmed its previous guidance to the firm as recently as Thursday.

However, the merger has been broadly welcomed by most analysts. Macquarie Research Equities' Andrew Wackett described the deal as a "win-win" for both groups. It would also avoid the substantial earnings per share dilution that AWB shareholders would have faced under the Gavilon deal, he said.

After slumping 7 per cent for no apparent reason on Thursday, AWB shares yesterday rose 3.5c to 99c. However, GrainCorp shares slumped 42c to $5.65, reflecting the valuation of the group based on the transaction terms.

The adjustment had the effect of eroding the small premium the deal was offering AWB investors based on the market capitalisations of both companies before the deal was announced.

Both groups spent yesterday afternoon canvassing the views of major shareholders, but several hurdles remain.

GrainCorp has opened discussions on regulatory clearance with the Australian Competition & Consumer Commission, which may harbour concerns about the group's monopoly in storage and handling on the east coast of Australia.

However, GrainCorp and AWB argue that their respective businesses are complementary rather than competitive.

The deal also requires AWB shareholders to vote in favour of a scheme of arrangement at a meeting due later this year.

An independent expert must advise whether the deal is in the best interests of investors, who are also entitled to a 15c per share dividend from GrainCorp once the scheme is implemented.

AWB has been looking for a global partner since losing its monopoly over Australia's bulk wheat exports two years ago.