GrainCorp’s planned demerger raises questions over LTAP takeover bid

Australian listed company has received ‘no recent definitive update’ on Long-Term Asset Partners’ mysterious offer.

GrainCorp is to spin off its global malting business into a separate listed entity, while continuing to engage with Long-Term Asset Partners over the latter’s bid to take over the Australian listed company.

The spin-off would result in two independent companies listed on the Australian Securities Exchange: MaltCo, a newly created global malting and craft brewing distribution business; and New GrainCorp, a domestic and international grain handling, storage, trading and processing business focused on grains, oilseeds, pulses, edible oils and feeds.

MaltCo would immediately become the world’s fourth-largest independent malting company, with operations in the US, Canada, Australia and the UK. GrainCorp said in a statement to the ASX that the business had generated EBITDA of A$170 million ($121 million; €108 million) in fiscal year 2018.

The statement said New GrainCorp would still operate the largest grain storage and transport network in eastern Australia and that the business would continue to focus on developing its global grains and oilseeds network.

New GrainCorp is considering implementing a “grain production derivative instrument” to reduce cashflow volatility linked to grain harvest volumes. Under such a contract, the business would receive cashflow protection when production was lower than an agreed threshold. In exchange, it would pay an annual fixed fee and make additional payments to the derivative counterparty when production was above an agreed threshold.

The firm said it already had an executed indicative term sheet for this long-term grain derivative from an unidentified “leading global insurer”. This element of the demerger echoes LTAP’s reported arrangement with insurer Allianz to smooth out volatility in GrainCorp’s grain handling operations as part of its takeover bid.

GrainCorp said discussions on the grain derivative were ongoing and that it was “not a requirement” for the demerger to proceed.

LTAP offered A$10.42 per share in December for 100 percent of GrainCorp in a deal worth around A$2.4 billion. Goldman Sachs is providing A$3.2 billion in acquisition facilities for the deal, and infrastructure debt specialist Westbourne Capital has committed A$400 million of debt financing.

GrainCorp said it had received “no recent definitive update” from LTAP on the status of the bid, and that it was continuing to engage actively with parties that had expressed an interest in acquiring parts or all of its portfolio. LTAP has been conducting due diligence on GrainCorp as part of its bid since mid-December.

LTAP did not respond to a request for comment on whether its bid was likely to progress or whether it would attempt a buyout of the demerged New GrainCorp.

GrainCorp last month announced the sale of its Australian bulk liquid terminals, which is set to proceed in parallel with the demerger. ANZ Terminals purchased those assets for an enterprise value of around A$350 million. The deal was conditional on GrainCorp not entering into a change-of-control transaction or a material alternative transaction before 10 May 2019.

At the time of that announcement, GrainCorp chairman Graham Bradley said LTAP’s proposal remained “indicative” and “non-binding”. There has been no update subsequently to change that.

The demerger is expected to be completed before the end of 2019. Further details of New GrainCorp’s proposed capital structure will be released once the sale of the bulk liquid terminals has been completed and evaluation of the proposed grain derivative has been finalised.