Sent: 03-12-2013 12:22:03
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Hockey Decision Gives ADM Lifeline
Ironically, Treasurer Joe Hockey's decision to block the takeover of GrainCorp by Archer Daniels Midland might have ensured the American company eventually gets its way. Meanwhile, the issues around GrainCorp could be a preview of future discussions about Qantas, Holden, the ABC and even the NBNCo where commercial icons have become entangled in a web of ill-defined national interests.
Joe Hockey blocked the sale of GrainCorp to US agribusiness giant ADM under the foreign investment laws after an acrimonious internal fight between members of the National Party and the more urban oriented Liberals making up the commonwealth government.
Hockey cited two reasons for his decision. Firstly, the attempted purchase had proven highly controversial. The other, more cogent argument, was that the grain storage and transport industry was moving through an adjustment to more competitive conditions which the takeover would hamper. This suggested allowing the takeover was a matter of timing rather than more deep seated opposition.
This was an arguable case but not one well argued by the Treasurer. He allowed the political overtones to dominate the assessment of what should happen. What appeared a hastily written statement to announce his conclusion offered little analysis to guide anyone about the principles behind a decision which followed months of study.
The political stakes had been raised by the way the contending parties lobbied the government. Deputy Prime Minister Warren Truss had taken to the national airwaves to make his case that the deal should be rejected. Reports from Canberra suggest that Agriculture Minister Barnaby Joyce threatened to resign if the Treasurer approved the GrainCorp sale.
Hockey publicly referred to attempts to bully him. At the time, these comments were taken as a swipe at his National party colleagues. Neither, it appears, did he appreciate the way in which ADM lobbied him to come down in its favour.
Hockey was in an awkward situation having to take a decision so close to the beginning of his tenure as Treasurer. Now, unfortunately, the GrainCorp decision will define his attitude to foreign investment at least until a bigger and more divisive decision has to be made.
The transaction was complex and had been modified on several occasions including in the few days before the Treasurer announced his decision. The Treasurer observed in his formal statement that the Foreign Investment Review Board itself had been divided on the advice he was proffered pointing to how vexed the transaction had become.
Although the current opposition Treasury spokesman has delighted at the chance to throw a few brickbats at his successor, he did not find a decision, conveniently shunted the other side of the recent election, any easier.
The decision has cut across conventional political fault lines. It united conservative commentator Judith Sloan and union heavyweight Paul Howes against Hockey's supposed spinelessness. It brought together the Nationals and the Greens in one of the more weird political meetings of minds in recent Australian politics (although some would say there is some natural affinity between the two most socialist oriented parties in the parliament).
In a sop to ADM, Hockey indicated he would allow the American agri-giant to own up to 25% of GrainCorp, up from its current holding of just under 20%.
In part, this was an attempt to keep ADM interested rather than have it walk away entirely. Critically, Hockey's sop will let ADM take over GrainCorp in the future at a much lower share price than it had in mind last week. In short, Hockey will have done ADM a big favour.
With ADM allowed 25%, GrainCorp could source $150-200 million in equity funds from ADM to undertake short term investments in new infrastructure. This would have the dual effect of allowing GrainCorp to get on with the job while demonstrating to some of the rural communities most anxious about the repercussions of the transaction that ADM was not such a monster after all.
In taking up the 25% stake, ADM will have effectively blocked any other potential buyer, if one exists. The takeover premium that might have existed in the event of competitive bidding will have been lost.
To fulfil its commercial ambitions and retain a growth oriented business, GrainCorp will have to find alternative sources of funding, most likely diluting existing non-ADM shareholders who could become progressively more disenchanted. The GrainCorp share price tumbled by over 20% following the Hockey decision. If competition in the industry intensifies, as GrainCorp loses some of its monopoly power, the share price could go lower.
By the time ADM launches another takeover offer, it might have been able to learn a lesson or two about what was needed to get some of the local communities on side. It might have also been able to persuade Truss and Joyce to be less hostile in their opposition.
The upshot of the Hockey intervention has been to weaken GrainCorp strategically. Shareholders will lose out. The farmers whose interests Hockey was being urged to protect will remain at risk. Ironically, the only party to benefit may be ADM because it will get its way eventually if it is just a little patient.
More broadly, Hockey has shown how difficult it is to extract the national interest from artificially constructed markets designed to accommodate the pleadings of special interests.
In the same week, a similar issue dropped in his lap with Qantas effectively asking for the shackles on its commercial activities to be removed. Qantas was effectively saying that it should be compensated for the business restrictions placed on it in the name of the national interest but not on its competitors.
Public funding for Holden, another fading Australian business with overblown sentimental appeal is also on the agenda. Again, the government will have to define the national interest and work out how much to pay for it.
The ABC no longer has a monopoly on the supply of serious news or BBC sitcoms. More intense questions have been raised about its role since it was used as a conduit by Edward Snowden and The Guardian newspaper to disseminate documents about Australia's espionage practices. As the media industry changes around it and the ABC keeps asking the government for more money to compete with commercial enterprises, a more clearly defined national interest test will be needed here, too.
Week by week, according to the new head of the national broadband network, implementation costs are rising. An Australian government could have left the rollout entirely in the hands of the private sector but it was not in the national interest to do so. The government will have to decide how much it should pay for that national interest in the coming year.
GrainCorp, Holden, Qantas, the ABC and NBNCo have their boosters. Until the government has some clear idea of what the roles of companies such as these are going to be, it will keep getting itself into binds that leave it looking more and more political and less capable of addressing important issues backed by a set of sound principles.
(John Robertson is a director of E.I.M. Capital Managers, a Melbourne-based funds management group. He has worked as a policy economist, corporate business strategist and investment market professional for over 30 years after starting his career as a federal treasury economist in Canberra. His daily Market Diary - Brief Thoughts on Current Issues is available at http://www.eimcapital.com.au/PortfolioDirect/daily_views.htm).
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