GrainCorp Verdict Clouds Australia Open-For-Business Pledge

GrainCorp Verdict Clouds Australia Open-For-Business Pledge

The Australian government’s decision to block Archer-Daniels-Midland Co. (ADM)’s takeover of GrainCorp Ltd. comes 12 weeks after Prime Minister Tony Abbott’s election-night vow that Australia is open for business. Citing national interest grounds, Treasurer Joe Hockey barred the A$2.2 billion ($2 billion) deal in the biggest rejection since Singapore Exchange Ltd.’s A$8.4 billion bid for ASX Ltd. was blocked in 2011. Also this week, Hockey flagged the possibility of taxpayer support for national carrier Qantas Airways Ltd. (QAN) Australia’s dollar fell and GrainCorp’s shares plunged 22 percent after today’s announcement.The GrainCorp decision “was a litmus test for the relative strengths of economic liberals and inward looking protectionists,” said Saul Eslake, chief Australia economist at Bank of America Merrill Lynch in Melbourne. “Today’s decision and the possibility of the government partially re-nationalizing Qantas, are from that perspective bad signs.”

Abbott’s Liberal-National coalition came to power Sept. 7 pledging to cut red tape for business and revive growth in an economy grappling with an elevated currency and waning mining-investment boom. Hockey’s decision is a win for the rural-based Nationals, who want increased scrutiny on foreign purchases of Australian land and had expressed concern over Decatur, Illinois-based ADM’s purchase of GrainCorp.

‘Government Unity’

“This decision was made with an eye on government unity as much as it was about the national interest,” said Paul Williams, a political analyst at Brisbane’s Griffith University. “The government can wear the knocks from the business community. What it can’t do is risk creating schism within the coalition.”

Nationals leader Warren Truss welcomed the decision, saying “the Australian grain industry must now get on with building a strong future for itself.”

Abbott said Hockey had acted as “the guardian of our national interests today” and reiterated his open-for-business pledge.

“We are open for foreign investment,” he told reporters in Adelaide. “It has to be foreign investment that accords with our overall national interest.”

Market Reaction

The Australian dollar fell 0.1 percent to 90.92 U.S. cents as of 4:26 p.m. in Sydney, heading for its sixth weekly drop. GrainCorp shares plunged A$2.48 to A$8.72.

The nation received a net A$57.6 billion in foreign direct investment for the year ended June 30, compared with A$59.5 billion in portfolio flows, according to data from the Bureau of Statistics.

The decision “risks undermining the federal government’s statement that Australia is open for business,” Business Council of Australia Chief Executive Jennifer Westacott said in an e-mailed statement. “It is important this decision does not increase uncertainty in the global community about the rules of the game on competition and Australia’s policy settings on foreign investment generally.”

The American Chamber of Commerce in Australia said it’s “concerned about the implications for foreign investment in Australia” from the decision. “While fully recognizing the sovereign right of the Australian government to make a national interest determination as part of their foreign investment approval process, AmCham is concerned about the signals this decision may send to other potential foreign investors.”

Level of Concern

The takeover proposal had attracted “a high level of concern from stakeholders and the broader community,” Hockey said today in a statement after advice from the Foreign Investment Review Board. “Of the 131 significant foreign investment applications we have dealt with, this is the only application we have prohibited,” Hockey said, adding the ruling didn’t signal Australia is closed to foreign investment.

Buying GrainCorp, the only major publicly traded grain merchant left in Australia after the country deregulated its wheat-export system, would have given ADM control of 280 storage sites and seven of the 10 ports that ship grain in bulk from the nation’s east coast.

Shadow Treasurer Chris Bowen said the rejection showed Australia is “not open for business.”

“The claims by this government that they would lure back investment into Australia lie in tatters this morning because Joe Hockey is too weak a treasurer to do the right thing by Australia,” Bowen told reporters in Sydney.

Qantas Cap

Hockey said yesterday the government was considering whether to lift a cap on foreign ownership of Qantas to “level the playing field” with Virgin Australia Holdings Ltd. (VAH) The second-ranked carrier earlier this month announced a share sale that could lift foreign airlines’ holdings of its stock as high as 70 percent.

A government buyback of up to 10 percent of Qantas has emerged as an option, the Australian Financial Review reported today, citing senior sources it didn’t identify. Hockey declined to comment on what he called press speculation.

“It looks a bit messy,” said Shane Oliver, head of investment strategy at AMP Capital Investors Ltd. “You’ve got talk of the federal government buying back a bit of Qantas, the GrainCorp decision, and those two are coming fairly close together only a few months after Tony Abbott declared Australia open for business.”

Still, Oliver said “we’re not going back to the dim-dark days of government intervention in the economy.”

To contact the reporters on this story: Michael Heath in Sydney at mheath1@bloomberg.net; Jason Scott in Canberra at jscott14@bloomberg.net

Australia Rejects U.S.-Based ADM Takeover of GrainCorp

Australia rejected U.S.-based Archer-Daniels-Midland Co. (ADM)’s planned A$2.2 billion ($2 billion) takeover of GrainCorp (GNC) Ltd., ruling foreign control of the east coast’s biggest crop handler isn’t in the national interest.

“This proposal has attracted a high level of concern from stakeholders and the broader community,” Treasurer Joe Hockey said today in a statement after advice from the Foreign Investment Review Board. “Now is not the right time for a 100 percent foreign acquisition of this key Australian business.”

Hockey’s decision is a victory for farm groups and country-based National Party members of the ruling coalition. While Prime Minister Tony Abbott declared the nation “open for business” after winning the September election, the rejection marks the first time a U.S. company has been blocked from buying domestic assets under Australia’s foreign investment regime, according to legal firm King & Wood Mallesons.

“It’s an extraordinary decision and it shows that Abbott isn’t a political ideologue, he’s pragmatic,” said Nick Economou, a political analyst at Monash University in Melbourne. “He’s willing to receive criticism from the business sector and the financial press because farmers and the rural community are an important constituency.”

ADM is “disappointed” by the decision and is reviewing its “capital allocation,” Chief Executive Officer Patricia Woertz said in a statement. The company won’t appeal, spokeswoman Victoria Podesta said in an e-mail. Angus Trigg, a spokesman for GrainCorp, didn’t immediately reply to a voicemail left on his mobile phone seeking comment on the rejection.

Ship Grain

Buying GrainCorp, the only major publicly traded grain merchant left in Australia after the country deregulated its wheat-export system, would have given ADM control of 280 storage sites and seven of the 10 ports that ship grain in bulk from the nation’s east coast. ADM made an initial bid last year, building its stake to 19.9 percent.

“We worked constructively to create an arrangement that would be in Australia’s best interests and made substantial commitments to address issues that were important to stakeholders,” Woertz said.

“Of the 131 significant foreign investment applications we have dealt with, this is the only application we have prohibited,” Hockey said, adding the ruling didn’t signal Australia is closed to foreign investment.

The biggest deal rejected by Australia was the proposed takeover of ASX Ltd., the operator of Australia’s largest securities exchange by Singapore Exchange Ltd. (SGX) That cash-and-shares deal was valued at A$8.4 billion when made in October 2010.

Takeover Test

“Australia’s FIRB assesses proposed takeovers on a case-by-case basis against the national interest test, with previous recommendations to the Treasurer setting no precedent for future cases,” Malcolm Brennan, special counsel for King & Wood Mallesons, who deals with more than 10 percent of the business cases brought before the board annually, said before the announcement.

The U.S. has contributed the most foreign investment into Australia each year since 2002 and Australia approved A$36.6 billion of deals involving U.S. investment in the 12 months to June 30 2012, according to the most recent annual report published by the review board. A total of 13 of 11,420 applications made to the board were rejected in fiscal 2012, all related to real estate deals, it said.

“Many industry participants, particularly growers in eastern Australia, have expressed concern that the proposed acquisition could reduce competition and impede growers’ ability to access the grain storage, logistics and distribution network,” Hockey said. Allowing the bid “to proceed could risk undermining public support for the foreign investment regime and ongoing foreign investment more generally,” he said.

Stake Increase?

There were no appropriate conditions that could have been imposed on the bid, Hockey said. He flagged ADM would be free to raise its stake in GrainCorp to 24.9 percent.

The rejection sends “a bad message,” said Saul Eslake, chief Australia economist at Bank of America Merrill Lynch in Melbourne. “One, it says that Australia isn’t quite as open for business as the prime minister indicated on election night. And secondly, it says that the National Party is going to exert a more significant, and I would say as a matter of personal opinion, more malign, influence on this government than their numbers in the parliament would suggest.”

To contact the reporters on this story: Jason Scott in Canberra at jscott14@bloomberg.net; Elisabeth Behrmann in Sydney at ebehrmann1@bloomberg.net

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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