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Cereal killers

29 November 2013 By John Foley

Australia is being mealy mouthed about protectionism. Treasurer Joe Hockey blocked the A$3.4 billion ($3.1 billion) takeover of agricultural trader GrainCorp by U.S. rival ADM on Nov. 29, on the grounds that Australia’s grain market is only just getting used to competition, five years after the national wheat monopoly was disbanded. For Australia’s foreign investment prospects, the decision itself is less bad than the ambiguity over why it was made.

The reason for blocking ADM’s bid seems to rest on the idea that a foreign bully is worse than a local one. After all, there’s little evidence that the combination would affect competition. Australia’s competition watchdog, which monitors the wheat industry, has already said it found no sign that the market would be concentrated – only that a big position in grain handling would pass from one company to another, which happens to be foreign.

Hockey’s logic isn’t totally bankrupt. As well as having most of its stakeholders outside of Australia, ADM would also have paid a hard-to-justify takeover premium. The A$70 million of synergies it predicted at the time of its offer in May, taxed and capitalized, might be worth around A$500 million, compared to the near-A$800 million difference between its bid and where the shares fell to on Nov. 29. That might incentivize it to shut down capacity, as Australia’s farmers fear.

The alternative, though, may be worse. Australia’s highly indebted agricultural sector could use capital, and ADM has plenty – its $2.3 billion of cash and short-term investments at the end of September was ten times GrainCorp’s. While Australia’s harvests are pretty dependable relative to other growers, it has been losing market share to aggressive Eastern European rivals, forcing it to seek ways to forge new relationships with buyers in Asia.

Investors can live with nationalism. Previous blocks on bids for the Australian Stock Exchange and Woodside Petroleum did little to dim Australia’s appeal to foreign investors. But fickleness is more troublesome. When his Liberal Party won the election earlier this year, Prime Minister Tony Abbott promised Australia was “open for business” – and this latest decision goes against that grain.


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