Demerger to cost GrainCorp about $50m, plus risks

GrainCorp-United Malt split means $50m in costs and risks

Agribusiness
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Demerging GrainCorp into two companies will cost the malt and grain businesses $50 million, plus unknown expenses

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The business of becoming two businesses is likely to cost the demerging GrainCorp about $50 million, and possibly more in expenses which haven't yet been quantified.

Spinning off its United Malt Group as a separate business on the Australian Securities Exchange could also have some share market-related risks and costs, according to the company's 385 page demerger scheme booklet mailed to shareholders last week.

They range from ASX listing and board related expenses to be incurred by United Malt, to new financing costs for both companies and a weaker share price for the slimmed-down GrainCorp.

The demerger's cost estimates come on top of an expensive 2018-19 year for GrainCorp which saw unsolicited buyer interest in the company and millions of dollars spent providing background information to the takeover suitor, Long Term Asset Partners.

The LTAP takeover move, plus expenditure associated with GrainCorp reviewing its asset portfolio to explore ways to get greater income value from its big infrastructure network, cost the east coast grain company about $35m last financial year.

This included paperwork and process costs related to selling off its Australian Bulk Liquid Terminals business for $333m in December, and an initial $20m spent on the demerger plan.

Both decisions were initiated as a result of the earlier portfolio review.

GrainCorp's engagement with LTAP came at a not inconsiderable cost and absorption of management time. - Graham Bradley, GrainCorp

The company also outlayed $7m for business restructuring associated with the demerger in 2018-19, and $3m on simplifying GrainCorp's grains business model.

LTAP's complex, highly geared "indicative offer", which was a hot issue for GrainCorp's board and staff for five months, ended in a whimper with no bid formulated.

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Chairman, Graham Bradley, told last week's annual general meeting GrainCorp's extensive engagement with LTAP "came at a not inconsiderable cost and absorption of management time".

Eventually, the previously unknown investment group had no binding offer for consideration and withdrew its proposal in May.

Graham Bradley

Graham Bradley

Some of the costs racked up by GrainCorp included its directors and management making "extraordinary contributions" to address the LTAP proposal, as well as other plans for the company's future.

The board met more than 20 times in 2019.

The advantages

Information to shareholders about the demerger has highlighted benefits in GrainCorp and United Malt pursuing independent growth strategies and tailoring their capital structures to fit each business' characteristics.

GrainCorp could accelerate a number of cost reduction and simplification initiatives once it was freed from the international processing business.

Both were expected to be in the ASX's top 200 companies list, and as separate businesses may also be more attractive to a partner or buyer, potentially adding a premium to their respective share values.

The risks

However, if shareholders gave the demerger plan their consent on March 16, "significant one-off transaction costs" for GrainCorp would likely total $49m, of which about $30m would fall in the 2019-20 year.

The newly listed United Malt also had to expect about $15m in ongoing corporate and operating costs relating to its ASX listing, including separate share registry, directorship, technology and insurance expenses.

The two companies would have also separate debt financing facilities which GrainCorp conceded may total more than those it currently paid.

Also, the value of United and GrainCorp shares after the demerger could be uncertain and hard to calculate for some time.

Meanwhile, apart from the LTAP bid and drought weighing on GrainCorp's management costs last year, its AGM heard of several other big costs contributing to a total $127m in "significant and abnormal factors" last year.

The biggest was 2019's sudden slump in global feed grain prices, which cost its trading division about $65m after it was caught with expensive forward purchased wheat and barley orders.

The grains business also suffered a $15m hit when it was unable to fully utilise its "take or pay" rail freight contracts after the poor 2018-19 harvest.

More favourable rail contracts have since been negotiated.

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The story Demerger to cost GrainCorp about $50m, plus risks first appeared on Farm Online.

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