Illustration: Kerrie Leishman.
TWO unsolicited foreign bids for two venerable Australian companies with growth prospects, two starkly different outcomes. It goes to show that in the takeover game, laying the foundations is crucial.
Commodities house Noble Group and its partner, steel-maker Posco of South Korea, said on Wednesday they no longer wanted to engage with the board of Arrium, the former OneSteel, after having a 75¢-a-share takeover proposal and a sweetened 88¢ offer rejected. Arrium's shares fell by 12.7 per cent on Thursday on the news.
GrainCorp, meanwhile, is quietly conducting due diligence on itself after receiving a $2.7 billion takeover approach from US-based agribusiness group Archer Daniels Midland. It won't accept the price Archer Daniels has offered but there is every chance the US group will prevail with a sweetened bid.
The divergent paths of the two takeover attempts reflect differences in the way the offers were mounted and the way the targets responded.
The OneSteel long products steel-making business was spun out of BHP in 2000. It merged with Smorgon Steel in 2007 and changed its name to Arrium in July to reflect the fact it is was expanding aggressively into iron ore, where it is boosting production from 8 million to 12 million tonnes a year.
Posco and Noble did not build a beachhead stake in Arrium before they launched their scheme of arrangement takeover proposal, and Arrium does not lend itself to a preliminary invasion because its ownership is fragmented.
Only one institution, 6.1 per cent shareholder GIC, owns more than 5 per cent, and close to half the company is owned by retail shareholders, many of whom crossed over from BHP.
GrainCorp has more institutional shareholders and was more open to a pre-bid raid that Archer Daniels duly launched. It quietly built a 4.9 per cent stake on-market and two weeks ago paid institutional shareholders $11.75 a share for portions of their holdings to vault its stake to 14.9 per cent. It then told GrainCorp's board it was prepared to pay the same price for all the shares in a cash takeover.
Archer Daniels had constructed a blocking stake that discouraged potential counter-bidders (GrainCorp's shares fell 11¢ to $12.16 on Thursday in a weak market after reports that two potential counter-bidders, Russia's Summa Group and Singapore's Olam, were non-starters) and its $11.75 price was 33 per cent above GrainCorp's share price of $8.85 before the approach.
It wasn't enough to catapult GrainCorp's board into Archer Daniels' hands. But it was enough to attract hedge funds and other short-term takeover punters - since the informal offer was made they have bought roughly as many shares on-market as Archer Daniels owns - and good enough to get GrainCorp's attention.
A bottom-to-top appraisal of the group and its prospects was commissioned to arm the board to respond.
The Archer Daniels offer is informal but it is also pretty simple. The US group is bidding on its own, has no funding issues, is offering cash and is able, if it wishes, to mount a cash takeover offer unilaterally if GrainCorp's board doesn't back it.
The informal bid also has no legal deadlines attached. That gives GrainCorp time to produce a considered response, time too for it to beat the bushes to see if counter-bidders are out there.
Over at Arrium, the ultimate ownership split between Posco and Noble was unclear, as was the financing of the deal. A ''highly confident'' letter from the potential bridge financier for the takeover, Bank of America Merrill Lynch, was conditional and did not amount to a cast-iron funding guarantee.
Posco and Noble also wanted a scheme of arrangement acquisition, which required the backing of Arrium's board, and while they also offered a takeover premium, it had asterisks attached.
The first 75¢-a-share proposal was pitched 38 per cent above Arrium's pre-approach of 54.5¢ but it was made at the beginning of October when Arrium's shares were still close to a year low in the wake of a plunge in the iron ore price, from $US149 a tonne in mid-April to $US117 a tonne at the beginning of August and $US86.70 a tonne on September 5. It was only 8 per cent above Arrium's volume-weighted three-month average share price and below a one-year average price of 93¢.
Posco and Noble upped their offer to 88¢ on Tuesday night, boosting the premium to 61 per cent, enough usually to have target boards salivating. But the iron ore price was back up to almost $US120 a tonne by then and the Arrium board's rejection was, if anything, more aggressive.
The same questions about bid financing remained, it said, and the new offer was pitched at only four times broker estimates of earnings in 2013-14, the first full year of expanded iron ore production. It was also only 2 per cent above the group's volume-weighted share price in the six months before the first takeover approach.
Posco and Noble announced they were no longer seeking engagement with Arrium on Wednesday afternoon, about four hours after the rejection was announced, and Arrium's shares fell 10¢ to 68.5¢ on Thursday. They did not fall right back to pre-offer levels because the iron ore price has risen by 37 per cent since the first approach was made, and because a decision to not engage with Arrium does not entirely rule out a hostile offer.
Posco does seem to like Arrium. It told its investors on October 23 there were many iron ore mining assets on the market in the wake of the iron ore price slide but ''Arrium has various advantages over others''. Of the two bids, however, the one by Archer Daniels was always the most likely to succeed.