Tanarra would only benefit if its suggestions are embraced and any benefit it received would be identical to that achieved for other shareholders – there’s no fee for advice or success.
Wylie identified Graincorp because it does have a dysfunctional structure, at least in sharemarket terms. Its share price is driven to a remarkable degree by the fortunes of the east coast grain crop even though at times, as is the case at present, its grains marketing, storage and logistics operations contribute almost nothing to the group’s earnings.
By contrast, Graincorp’s highly-rated international malt business and its bulk liquid terminals business (which handles canola oil) generate stable earnings; this year almost the entirety of the group’s earnings.
The volatility of the grains business can be seen in the Graincorp share price. Eighteen months ago the shares were trading at about $10.40. Their peak this year before the LTAP offer emerged was about $8.95, in June. Just ahead of the LATP approach they traded at $7.30.
The Graincorp board now has two alternative “solutions’’ to that issue of volatility. The LATP approach, if it morphs into an actual offer, would be a complete solution. They’d sell the company for $10.42 a share.
Under the Wylie plan, they’d sell the grains assets to a trade buyer or demerge them, leaving the malt and bulk liquid terminals operations as the continuing operations.
Wylie has told the Graincorp board that he believes the combination would give shareholders the equivalent of about $10 a share – but leave the control premium for the world-class malt business and the liquid terminals business intact and available.
He believes the liquid terminals should be classed, and valued, as infrastructure assets, leaving the option open to sell them, too, to infrastructure investors.
There are some boards that might prefer to recommend a clean exit for cash to the restructuring of their company and the sale or demerger of what are both essential and politically-sensitive agribusiness assets. The rejection by Joe Hockey of Archer Daniels Midlands’ bid for Graincorp in 2013 underscores how politically sensitive the grains assets are.
It’s that sensitivity, and the essential nature of the grains assets and operations to east coast farmers that the Graincorp board will be considering as it weighs up the merits of Wylie’s plan against the LTAP proposal.
The LTAP offer, conditional on access to due diligence that will probably be granted, is a straightforward $10.42 a share cash offer. Underneath that price, however, is a structure that is anything but straightforward.
The structure is largely debt-funded, with a skinny equity base, but has a very novel feature. LTAP has reportedly negotiated some form of insurance, or reinsurance, arrangement with Allianz under which the giant insurer would insure the larger part of the agricultural risk, underwriting a substantial proportion of the revenues from the grains operations.
That would remove significant risk and volatility and, LTAP believes, allow Graincorp’s debt to be rated as investment grade despite the high degree of leverage.
A concern for the Graincorp board would be the leverage and the extent to which there would be residual risk for LTAP in the event of unusual severe weather conditions or some other unforeseen event. While today’s shareholders would have sold, its farmer customers – and the east coast grain sector’s logistics – would be exposed if the modest amounts of equity in the structure were wiped out.
Wylie believes the market in Graincorp shares has become a derivatives play for hedge funds and day traders betting on weather and crop outcomes – there is a very high correlation between the share price and fluctuations in the east coast crop – and that overwhelms and results in a severe under-valuation of the high-quality malt and liquid terminals operations.
Distancing the volatile operations from the stable ones would unlock value while allowing the grains business to either be owned from someone with the geographical spread of operations to be able to deal with that volatility or by shareholders willing to live with the volatility of a pure grains business.
It isn’t a straightforward comparison between what Wylie’s proposing and the LTAP proposal and the issues the board will inevitably have to consider go beyond simple returns to shareholders to at least some consideration of the group’s customers and, given the strategic nature of the assets, the national interest.
Stephen is one of Australia’s most respected business journalists. He was most recently co-founder and associate editor of the Business Spectator website and an associate editor and senior columnist at The Australian.