The secret to the financial structure behind the debt-heavy $2.4 billion bid for east coast grain giant, GrainCorp, is likely to remain fairly secret for some time.
Despite speculation that European insurance giant, Allianz, is set to play a long-term underwriting role to effectively insure GrainCorp’s crop buying activity and earnings under the proposed ownership structure, the ambitious private equity bidding group won’t say who is actually involved.
However, Long-Term Asset Partners (LTAP) has indirectly conceded an insurance underwriting strategy would be important in maintaining stable asset returns from GrainCorp’s extensive storage, handling, processing and dockside portfolio.
A spokesman hastened to add the plan took about five years to develop and could not be compared with any “vanilla insurance product or multi-peril crop insurance already available to farmers”.
“It’s entirely new. It’s hard to say when, or if, the specifics will be public or who’s involved, even after GrainCorp signs the confidentiality agreement,” he said.
LTAP confirmed a similar earnings insurance strategy to support the takeover bid was also considered during earlier funding talks with Macquarie Bank and US-based global investment bank, Moelis and Company.
That was some time ago and the latest plan was considerably more detailed.
LTAP has since secured a $3.2b bridging loan from Goldman Sachs and $400m from Westbourne Capital to cover its offer, including GrainCorp’s balance sheet debt.
In fact, LTAP is understood to be reluctant to provide too much sensitive disclosure information lest it helps the grain business adopt the same sort of insurance strategy, something GrainCorp may have already been considering to help it ride out future seasonal fluctuations in earnings.
GrainCorp has stayed silent about bid discussions this week while it negotiated with LTAP the due diligence required to assess the “complex financing structure".
However, the LTAP team has confirmed, if successful in its $10.42 a share scheme of arrangement deal to privatise GrainCorp, it would spend big sums upgrading key grain loading sites to improve freight-to-port efficiencies.
We’d want to get the work done as quickly as possible to improve GrainCorp’s competitiveness on the export pathwayNigel Hart, Long Term Asset Partners
Within a few years of taking over it planned to outlay about $150 million finalising GrainCorp’s $200m Project Regeneration agenda which has concentrated grain receivals on about 180 silo sites in 34 key clusters within the Queensland, NSW and Victorian network.
Project Regeneration launched in 2014, but infrastructure upgrading activity has been slow during recent poor cropping seasons.
LTAP chairman, Tony Shepherd, and chief architect of the GrainCorp privatisation attempt, Chris Craddock, have prioritised fast receival times and better storage options for growers, and improved rail loading and port throughput, to boost network earnings.
“We’d want to get the work done as quickly as possible to improve GrainCorp’s competitiveness on the export pathway,” said senior executive team member, Nigel Hart.
“Our focus will be to get grain onto rail lines and having fewer trucks on roads, upgrading rail loading sites and reducing the turnaround time for vessels in port.”
The infrastructure upgrade work would take about two years to complete, depending on other related parties involved, including government rail operators.
Meanwhile, LTAP’s takeover bid has also stirred other investment market speculation about how to generate more consistent returns for shareholders, which in turn prompted GrainCorp chairman, Graham Bradley, to note price was not the only factor being considered by his board.
Given it played a significant employment and farm service role in eastern states grainbelt communities, GrainCorp was “very conscious” of its social purpose, as well as profitability.
Interestingly, Mr Bradley was agreeing, in part, with observations about GrainCorp’s responsibilities in the bush made by investment banker, John Wylie.
Mr Wylie’s Tanarra Capital owns shares in GrainCorp and is uneasy about the big debt risk in LTAP’s bid and the consequences which could befall farmers and other stakeholders if events such as prolonged drought restricted its ability to service the significant debt.
He felt there was a risk future losses by GrainCorp would be "socialised” while profits were “privatised at the expense of farmers".
However, to avoid that risk Mr Wylie apparently supported breaking up the company, offloading its oilseed processing division and selling the grain handling and storage network to another trader while keeping its international malt business and bulk liquid terminals as primary activities.
This would protect earnings from seasonal volatility, giving shareholders about $10/share equity in the remaining demerged business which would control of its world class malt and storage terminals operations.
GrainCorp is the world’s fourth biggest malster and has food grade liquid terminals in all states and New Zealand.
GrainCorp has not commented on Mr Wylie’s advice, however the demerger idea would be a direct contradiction of the company’s 15-year diversification strategy to reduce reliance on seasonally vulnerable grain markets and volumes.
What the GrainCorp bid has shown, by looking to use an insurance product against catastrophic seasonal conditions, is that using insurance to mitigate climate change and forces is the way forward in agricultureAndrew Trotter, Latevo
LTAP noted grain industry players Australia-wide and overseas integrated their storage, logistics and marketing activities with processing and diverse geographic footprints to help profit-proof earnings.
“You need diversity to get the most value out of the supply chain for your customers and your own business efficiency,” Mr Hart said.
Commenting on LTAP’s assumed sophisticated income insurance arrangement, seasoned multi-peril crop insurance player, Andrew Trotter noted big agribusiness players was clearly thinking beyond traditional horizons to make the industry more sustainable to investors.
"What the GrainCorp bid has shown, by looking to use an insurance product against catastrophic seasonal conditions, is that using insurance to mitigate climate change and forces is the way forward in agriculture," said the Latevo Farm Income Protection principal.
"This does not just apply to big business but also to the farming sector.
"By using insurance to underpin your business you have something to fall back on."
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