ABB Far From A Done Deal

This story features AUSSIE BROADBAND LIMITED. For more info SHARE ANALYSIS: ABB

By Greg Peel

Yesterday ABB Grain ((ABB)) confirmed it has received a “conditional and non-binding” approach from Canadian company Viterra to acquire all of its shares. The offer consists of a mix of cash, Viterra shares and franked dividends, which equates to somewhere between $9.00 and $9.50. ABB shares are today trading at $8.60 but a week ago they were closer to $6.20. ABB management announced it had been in discussions but gave no assurances a transaction will take place.

And it probably won’t, neither at the price or indeed perhaps at all.

Viterra is Canada’s largest agribusiness company, with operations across North America and Asia. Its businesses are diversified across crop and equipment sales and service, handling and marketing, livestock feed, food processing and financial products. ABB Grain was once the Australian Barley Board – a government sponsored cooperative of barley farmers united to source export contracts and organise grain handling. Its counterpart was the Australian Wheat Board, now AWB ((AWB)). ABB is now incorporated but while malt remains a focus, its interests have long ago expanded beyond barley specifically. Since 2002, notes Macquarie, ABB has consistently expanded through a combination of organic and acquisitive growth.

Australia is the biggest producer of grain in the southern hemisphere. Viterra has a stated strategy of expanding its horizons, which clearly must include the southern hemisphere, and has recently raised capital to that end.

But this is not an opportunistic takeover attempt. ABB is not a company in dire straits, beaten down by GFC impact and the need to either refinance burgeoning debt, sell assets quickly or raise capital. Its balance sheet is actually in very good shape and only recently ABB tried to talk AWB into a merger, although talks broke down. In the meantime, ABB has further expansion projects on the board, and clearly it is itself in an acquisitive position.

ABB ‘s share price has fallen from a high of over $10 (including one brief spike to $12) from a combination of broad GFC selling and more recently the global crash in grain prices. Nor has ABB escaped the ravages of the Australian drought, although only this week solid rains right on cue were enough to fool some commentators into initially believing it was rain, and not a takeover offer, which had made ABB’s share price shoot up. And grain prices have been on the improve. Macquarie is forecasting a 40% increase in earnings at the half-year result, due May 26.

In other words, while there is consolidation underway (and needed) in the Australian agriculture sector, and the same is happening globally, ABB does not actually need to be taken over at this point, and certainly not cheaply.

So the first question to answer is: Is a bid of $9.00-$9.50 a good one?

GSJB Were believes it is reasonable. The analysts had already ascribed a $9.54 discounted cashflow value to ABB and note that assuming a “normal” crop year – meaning not drought-affected – the offer range represents a PE ratio of 15.3-16.1x and an enterprise value to earnings ratio of 11.5-12.0x. These numbers, GSJBW analysts say, are in line with average transaction multiples in the sector.

Deutsche Bank, on the other hand, suggests the offer does not make enough allowance for synergies and a good old takeover premium. Deutsche suggests a price of $11.00-$12.00 might be needed before anyone can get interested. Both Deutsche and Weres make the important point that there’s more than just money to consider.

ABB began as a farmers’ cooperative and to this day 75% of its share register is represented by said farmers. One can imagine that the cockies were mostly somewhat sceptical about this incorporation business, which came about during Howard’s long-running “everything must go” sale. If it ain’t broke, why fix it? And now someone’s suggesting they hand all responsibility for Aussie grain handling and export distribution to a bunch of cowboys from the other side of the Pacific, in exchange not for cash but for a combination of cash and shares in this foreign business.

We all know just how much farmers believe they are the salt of this earth, and how much we all owe them for multiple generations of ancestors tackling the sunburnt country and tilling the fields and providing all Aussies ever since with their sustenance. Are they really going to up and sell that all to Canada?

From the outset of the incorporation of the Australian Barley Board, it was built into the company constitution that no one shareholder could acquire more than 15% of the voting shares. This was to protect the farmers’ collective against some unscrupulous monopolist either from the next town or worse – from the Big Smoke. In order for Viterra – or anyone else for that matter – to take over ABB this constitution would have to be changed, and that can only be done by a majority vote of shareholders.

There might be some struggling farmers out there who’d love to take the money and run. But for the rest it’s a matter of what price is good enough to sell out? Is any price good enough?

Ahead of the takeover offer, brokers in the FNArena database already had a 7/1/0 B/H/A ratio on ABB with an average target of $7.98. There has been no change this morning other than Macquarie (Outperform) having to withdraw its recommendation given it is advising on the deal. Given GSJB Were thinks the bid is about right, it has not budged from Hold. The target, on the other hand, has only lifted to $8.11.

There is little belief in this first bid, or perhaps any bid from Viterra, succeeding.

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