WCB approval fuels bid war – but GrainCorp decision looms

Bidding war: Bega Cheese has upped its bid for Warrnambool Cheese and Butter. AAP

Treasurer Joe Hockey’s unconditional approval of a $450 million takeover offer for Warrnambool Cheese and Butter (WCB) by Canadian company Saputo has intensified the bidding war around the dairy company.

Murray Goulburn, which already owns part of WCB and operates in the region, has now raised its bid from A$7.50 cash per share to A$9.00. Rival bidder Bega Cheese has also lifted its cash-and-shares offer to a value of A$8.87 per share.

But another potentially more contentious decision looms by December 17: the A$3.4 billion takeover bid of Australian grain handling company GrainCorp by US multinational Archer Daniels Midland (ADM).

Can we treat the approval of the WCB offer by Saputo as a signal that the sale of GrainCorp to ADM is also likely to be approved?

Discretion of the Treasurer

The Foreign Investment Review Board (FIRB), which sits within Treasury, may consider any criteria that relates to the national interest, with the final decision at the discretion of the Treasurer. The reasons for decisions are not published, so stakeholders - including the Australian public - are not privy to deliberations.

ADM’s offer for GrainCorp would formally require FIRB approval because it exceeds the A$1.078 billion threshold for sales to US companies. The Saputo offer for WCB needed approval because it is above the lower threshold of A$248 million for countries other than the US and New Zealand.

The FIRB has approved many other large foreign infrastructural and resource acquisitions, so it may do so for ADM’s takeover of GrainCorp.

But whether the WCB decision heralds greater sympathy by government for foreign investment is subject to conjecture about the balance of divided views within the Coalition.

However, the speed of the WCB decision might be a signal, given the GrainCorp decision may yet precede the release of the final report of the Senate Rural and Regional Affairs and Transport References Committee Inquiry (SRRATRI) into ownership arrangements of grain handling, which released its Interim Report on 30 August, prior to the election.

Recommendations included that the Australian Competition and Consumer Commission’s informal review into the ADM takeover be re-opened. The corporate regulator had found that an ADM takeover would be unlikely to substantially lessen competition. The Senate Inquiry also recommended that the FIRB consider the evidence from the Inquiry’s public hearings, the taxpayer implications of ADM’s tax minimisation, capital market distortions, food security and the interests of grain growers.

More contentious

The complex infrastructural nature of GrainCorp’s activities offers reasons why its sale may be more contentious than that of WCB. Foreign investment applications for purchase of infrastructure have tended to take longer than other decisions and this may apply to GrainCorp relative to WCB.

A successful bid by Saputo for WCB may be seen to maintain competition in the regional dairy industry, by keeping a third party to dairy processing in the region. Milk and dairy product prices are subject to competition on the world market regardless of ownership of the entities in the supply chain, once domestic regulation was removed.

However a reduction in the number of dairy processing companies operating in a region from three to two may still affect prices at the farm gate and farm logistics. Murray Goulburn’s bid may yet raise competition issues. Other foreign companies such as Kirin (which has increased its existing stake in WCB to just under 10%), Fonterra, Parmalat, Lactalis and Kraft already operate in the Australian dairy industry and facilitate access to the international market.

By contrast GrainCorp is operating in the infrastructural industry of grain handling on a very large scale with seven grain elevators across seven ports in eastern Australia and two speciality terminals, and 280 elevators in the country. It has also extended into processing with a joint venture with US miller Cargill, and into logistics and marketing replacing a part of the old single desk system, and into malting overseas. ADM already owns nearly 20%, UBS over 8% and Deutsche over 5% of GrainCorp.

What is FIRB likely to consider?

A major consideration of national interest relates to GrainCorp’s grain handling activities, crucial to Australia’s grain industry. These are the logistics of moving grain, mainly wheat, from rural storage to railhead to storage at ports for shipping and export. Grain handling and other bulk handling facilities were previously a part of the publicly owned and integrated rail, storage and port infrastructure.

Like other privatised infrastructure, these are subject to regulation aimed at limiting monopoly pricing and at the same time enabling profitability to the subsequent private owners. The extent of competition for GrainCorp’s activities, including currently a single other grain export terminal, would be part of a national interest consideration as recommended by SRRATRI.

Pricing to ensure sufficient investment for technological advance, stability and growth in the longer term is also a challenging issue for privatised infrastructure.

The regulatory framework for privatised infrastructure including energy, ports, and freight and public transport makes them an attractive proposition for multinational investors. As grain handling is one of these network industries, adding locations to it increases its overall value more than proportionally, tending toward monopoly.

Moreover Australia’s wheat (11% of world exports) and other grain exports are large enough on the world market as to potentially affect the world price. However profits are subject to huge seasonal and cyclical variation in activity due to issues such as drought and recession. Food security also has been identified as a consideration by SRRATRI.

Access issues

According to the Senate Inquiry Second Interim Report, if ADM’s bid succeeds, it would control 87.5% (or seven eighths) of east coast grain handling infrastructure. ADM is one of the four biggest multinational food conglomerates. It operates throughout global grain supply chains including ethanol and excipients (fillers for pharmaceuticals and cosmetics). It is the largest grain processor in the US.

National interest would consider the relevance of adverse findings in court cases relating to price fixing and pollution, and that ADM has apparently lobbied for and gained agricultural subsidies in the US including for ethanol. Tax minimisation strategies are another concern in the SRRATRI recommendations.