Why Hockey Really Blocked The GrainCorp Sale

Prime Minister Tony Abbott’s declaration on election night that Australia was “open for business” was a rhetorical salute to the big business interests that had backed his government into power. “We will not let you down,” he told his supporters on election night. So when one of Treasurer Joe Hockey’s first big decisions last Friday was to block the takeover of GrainCorp, they were disappointed and frustrated.

National Party leaders, rural Liberal MPs including NSW Senator and farmer Bill Heffernan, the Greens, and farmers groups, were vehemently opposed to the takeover by Arthur Daniels Midland (ADM), a global agribusiness giant involved with 130 companies. ADM planned to gobble up GrainCorp, which has a near monopoly of Australia’s bulk grain exports, as well as strong interests in seeds, oils and malt.

Hockey has been accused of caving in to the "agrarian socialists" of the National Party. National Party leader and Deputy Prime Minister Warren Truss, Agriculture Minister Barnaby Joyce, and Fiona Nash, Deputy leader of the Nationals in the Senate, have all spoken out strongly against the proposed sell-off since the election.

These Nationals and other opponents of the deal would not accept at face value assurances from the GrainCorp and ADM’s boards that the extra capital and efficiencies that come with being part of a massive global business would lead to more prosperity for wheat farmers. Those supporting the deal dismiss fears that the takeover could leave Australia’s farmers and its food security at the mercy of an agribusiness giant as old-fashioned and baseless.

ADM was anxious to clinch the deal, which would provide it with a base in the Asia Pacific region from which to sell agricultural commodities to Asia. Since its first offer last October, ADM has increased its bid. Last week it added an extra $200 million for infrastructure and arrangements for community consultation.

Like most global companies, it prefers the relationship with government to flow its way. In the US, its ethanol business, which flourished on the basis of government subsidies, is looking shaky now those subsidies have been withdrawn. In October, it was threatening to move its headquarters from the state of Illinois if it does not receive some tax incentives.

ADM had good reason to be confident that its well connected lobbyist, Government Relations Australia (GRA), would shepherd the deal through. GRA is chaired by ex-Labor finance and trade minister John Dawkins. His co-chair is Helen Coonan, communications minister in the Howard government. Coonan is also an advisor to JP Morgan and a director of James Packer’s casino chain, Crown Ltd.

The biggest immediate losers are those in the background — GrainCorp’s investors. Most of them are hidden behind big names, like substantial shareholders Credit Suisse and USB AG, who invest on behalf of clients. Under Labor, they were confident that the deal would eventually go through but as opposition built, prospects looked increasingly shaky.

Before the election, stockbroker JP Morgan was optimistic. The Australian Competition and Consumer Commission (ACCC) had cleared the takeover and JP Morgan predicted there would be “no issue” with the Foreign Investment Review Board approving the deal.

After the Coalition gained power, rural MPs were now part of the government and opposition gained momentum. JP Morgan analyst Stuart Jackson became cautious. "The risk of not receiving regulatory approval is low (but not insignificant)," he told his clients. Nevertheless JP Morgan continued to recommend buying the shares until two weeks ago, when it downgraded its advice from “buy” to “neutral”.

By last week, GrainCorp stock was trading at about $11.15. If the bid had gone ahead, shareholders would have received $12.20 cash, plus a 75c dividend, with an additional 3.5c dividend for each month’s delay after 31 September 2013. This promised a very healthy return of 17 per cent per share. Once Hockey’s decision was announced, the GrainCorp share price tumbled 25 per cent as investors rushed to dump their shares. Today, GrainCorp CEO Alison Watkins resigned.

Money Managers and GrainCorp

Among those dumping the shares were hedge funds, which aggressively manage the funds of wealthy investors. They aim to generate high returns on high risk investments, often developing an investment strategy around an event such as a takeover, and garnering an advantage by predicting movements in stock prices. Hedge funds charge fees for going for higher returns and, if successful, claim a commission of profits.

Two weeks ago, Senator Bill Heffernan told the Stock Journal, “parliament is being bombarded by lobbyists wanting to protect the GrainCorp sale, with hundreds of millions of dollars up for grabs to be made for hedge funds".

The Australian Financial Review reported that “hedge funds and fund managers … are on tenterhooks. They are calling anybody even slightly associated with the deal, desperate for any hint of what the outcome will be”.

Wilson Asset Management (WAM) was one fund manager that continued to recommend buying GrainCorp shares up right until the decision. According to a company presentation, its holdings in GrainCorp were the second largest market driven holding in its portfolio.

WAM's Geoff Wilson told NM last week that approval of the deal is the only “logical thing to happen” if you are taking an “economic rationalist approach” — although “illogical things do happen”.

Those who argue that this is a simple political cave-in are ignoring arguments against would-be buyer ADM, and damaging material about the company that was about to be aired in the full glare of media attention over the next two weeks of parliamentary hearings.

Four Lower House MPs — Independent Andrew Wilkie, Clive Palmer of the Palmer United Party, Greens Adam Bandt and Queensland MP Bob Katter — were planning to move a motion for the takeover to be discussed in parliament.

Heffernan, himself a socially conservative farmer who has been an ally of Tony Abbott, is a formidable opponent. He chairs the Rural and Regional Affairs Committee, which issued an interim report opposing the deal before the election. Reporting of the committee during its hearing mid-year had been scant, but the hearings and report provide a hint of what was to come when the committee reopened its hearings in coming days.

The committee's interim report cited concerns about ADM’s record of tax minimisation, a sensitive topic when the government is moving towards major cuts to public spending, and its involvement in 22 court cases, a list of which was tabled at the hearing.

While ADM had emphasised its positive corporate culture and strong guiding values to the committee, the committee found that “ADM's corporate culture and, in particular, historical record of unethical and illegal behaviour, introduced reputational and other risks for Australian growers”.

It noted that ADM had been accused of tax evasion overseas and found that the potential impact on Australia's revenue base from ADM's bid should be given close attention by FIRB.

It was concerned about the potential for ADM to use its market power to the detriment of Australian growers, including through restricting or increasing the costs of third party access to its newly acquired grain handling network.

The committee was critical of the ACCC and said it was “concerned that the ACCC did not have the expertise to undertake a full and proper review and did not obtain independent expert advice”. It promised a tougher examination of the ACCC when hearings reopened.

A hint of what was to come was aired when Jim Lieber, who wrote an expose of ADM’s operations in the 1990s, was interviewed on the ABC's Lateline program.

This Lateline interview followed up on issues raised in a Background Briefing that was relied on in the Senate Committee’s first report. Lieber said that ADM was a reformed and different company from the days when several of its executives were jailed in a massive price fixing scandal.

Nevertheless, he added that people who watch ADM do “have some concerns” — especially because ADM is such a dominant agribusiness player, “vulnerable to corruption and market manipulations”. He described ADM as a master at manipulating governments, preferring cornered markets to free markets.

ADM’s own annual reports refer to a tax problem in Brazil, where the government has challenged currency hedging losses claimed by the group in recent years. This could cost $600 million dollars.

ADM also disclosed in August this year that it had earmarked more than double its previous amount to pay for breaches of US Foreign Corrupt Practices laws, to US$54 million. It said it had reviewed “certain transactions” that may have “violated company policies, the US Foreign Corrupt Practices Act, and other US and foreign laws”.

The company has assisted the Brazilian investigation but noted that the government could impose “civil penalties or criminal fines and/or order that the Company disgorge any profits derived from any contracts involving inappropriate payments”.

No one could be in any doubt about what Heffernan, a man known for his forthright manner, intended in these hearings. At one point during the earlier hearings, he asked a witness:

“I have 42 pages of criminal convictions, market distortions, price-fixing, arguments with the Brazilian government and the Argentinian government, the largest corporate fine in America's history and a $400 million private settlement instead of a $3.5 billion court case. You think that somehow you should not be concerned about that?”

The Donor

While most of the supporters of the deal are in corporate offices in Australia and overseas, a few rural supporters will be also licking their wounds. The most vocal of these is Australia’s biggest wheat farmer Ron Greentree.

Greentree, who farms 50,000 hectares near the NSW Queensland border, initially shared the concerns of other farmers. In recent years he also donated large sums to the NSW Liberal Party. Between 2010 and 2012 he gave $85,000 to the Liberal Party and $25,000 to the Nationals. (Donations for the last election have not been published.) This makes him the third biggest Coalition donor in the food and pastoral sector.

Greentree did not reply to questions from NM about the purpose of his donations. There is no evidence that the donations are directly connected to the GrainCorp deal.

Greentree appeared before Heffernan's Senate inquiry into the ADM deal, and declared his wife’s interest in $15,000 of GrainCorp shares. Senator Fiona Nash questioned him about the circumstances in which he shifted his initial opposition to the takeover. Greentree told her that ADM had rung him and requested a meeting. He invited them to come to his farm and after discussions he changed his mind.

One of the reasons was that he believed ADM would support the Australian wheat industry in drought years. Senator Nash was unimpressed by a notion of cross subsidisation.

The GrainCorp issue is far from over. The farmers will be watching to see how GrainCorp responds as its share price falls and whether ADM will attempt a future takeover. Financial players and right-wing business interests back in the cities will be tightening the screws on the government to be more “rational” in the future — which means delivering what they see as in their interests or what they call the “national interest”.