AWB Bid Fires Up The Agri Sector

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By Greg Peel

After long hard years of drought, commodity price ups and downs and court room drama, Australia's once mighty agricultural sector has has had a tough time of it in recent years. Underlying the volatility has been a widely held view that food is becoming a more valuable resource given exponential population growth and the emergence of new economies, and as such listed agri companies are a good long term bet. But it's been a rough ride.

That view has not necessarily diminished, but it has once again been brought into focus by soaring grain prices – the result of Russian drought and fires and floods in China and Pakistan. Were high prices the reason why Canada's Agrium has suddenly moved on Australia's AWB? Unlikely.

It has been an inevitable result of the GFC that industry consolidation has since been ongoing, as money moves “from weak hands to strong”. Such recessions bury the weak but the strong can survive to become stronger by picking over the corpses, or by targeting the weak in the herd. No more has this been apparent than in the global, and particularly Australia's, mining sector, with China leading the charge to push metal and mineral prices higher. But it is oft forgotten Australia is also a major exporter of agricultural produce.

Yesterday Calgary-based Agrium – a wholesaler/retailer in the North American agri market – made an all cash offer at $1.50 for AWB ((AWB)). Formerly the Australian Wheat Board, AWB, offers rural services and commodity management in Australia and elsewhere.

The bid eclipses an earlier merger offer from Graincorp ((GNC)), which provides handling and marketing services to Australian grain growers. Stock analysts saw such a merged entity as being a sensible one, but the Agrium bid has now trumped the GNC offer. It is, however, conditional, both on due diligence to be performed by Agrium and FIRB approval. Until both hurdles are cleared, AWB still has an attractive offer from Graincorp standing.

Will Graincorp up its offer? Analysts see some scope for an increase before the deal becomes earnings dilutive (Citi suggests $1.55 is possible) but the fact is while an attractive proposition, an AWB merger is not a desperately needed move for GNC. There is no need for GNC to enter a bidding war.

Will another counter-offer emerge? This is quite possible. Last year Agrium's Canadian competitor Viterra took out ABB Grain – the old Australia Barley Board – which suggests current moves in the sector are not just about a sudden jump in grain prices. It's a wider strategy, albeit strong grain prices only serve to focus attention.

Will Viterra counter perhaps? Or someone else? Anything is possible at this stage. But what the latest move does suggest is that the Australian agri sector is in play, and AWB may not be the only possible target. Agrium's bid for AWB represents a 40% premium, notes Citi and a significant premium to the company's net tangible asset valuation.

Citi thus believes Graincorp itself could be a target, along with struggling players such as rural, financial and real estate services player Elders ((ELD)) and livestock nutri-product producer Ridley Corp ((RIC)).

But the story gets even more complex.

Elders in particular has been considered to be a possible takeover target already from domestic suitors. National Bank ((NAB)) has had its eye on Elders' rural bank, while Wesfarmers ((WES)), which boasts agribusiness in its portfolio as well as coal and Coles, and fertiliser producer Incitec Pivot ((IPL)), have been suggested as possible buyers of the balance.

There has even been talk that Wesfarmers might be eying Incitec or Incitec eying Wesfarmers' agribusiness.

Incitec, for one, might have reason to see the need for some consolidation. Agrium's attempted move into the Australian market is to secure new distribution channels for its agri products, which include fertilisers and crop protection products. Thus Agrium will emerge as a competitor for Incitec's local phosphate market, along with Nufarm's ((NUF)) glyphosate market. BA-Merrill Lynch does not see the competition as having an FY11 impact, but it would look to trim FY12 earnings forecasts were the AWB takeover to proceed.

It's all enough to make a farmer's head spin. Traders, however, are licking their lips in anticipation.

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