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Hockey blocks GrainCorp sale

Treasurer Joe Hockey has blocked the takeover of grain handler GrainCorp by US multi-national ADM, attracting the condemnation of Labor.

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Joe Hockey’s decision to block Archer Daniels Midland’s $3.4 billion takeover of GrainCorp is nakedly political.

International investors won’t sell out of Australia because of it, but they will now price in the risk that there will be more decisions like it. 

International investors now know that while Treasurer Joe Hockey and Prime Minister Tony Abbott have declared that Australia is open for business, it is not open for business if the business proposal worries cliques within the Coalition: Nationals leader Warren Truss and  deputy leader Barnaby Joyce led the campaign against the deal.

Hockey said the Foreign Investment Review Board was divided about the national interest implications of the takeover, and ADM certainly was a late mover, bidding after two other foreign takeovers in the industry for a business that would have roughly doubled foreign ownership of grain handling to about 70 per cent.

Hockey still had the final call on the bid, however, and in his announcement he didn't serve up compelling reasons for coming down against it.

The grain industry needed more time to transform itself after being deregulated in 2008, he said, and industry participants and growers in eastern Australia where GrainCorp stores, transports and exports grain in particular had ‘‘expressed concern that the proposed acquisition could reduce competition and impede growers’ ability to access the grain storage, logistics and distribution network’’.

The competition implications of the takeover had been already assessed by the peak competition regulator, the Australian Competition and Consumer Commission: it was not concerned. And if the local industry is not ready after five years of deregulation to operate in an open market that includes  an open market for takeovers, when will it be? On that there is no clue given.

Archer Daniels Midland put out a polite statement acknowledging the decision this morning, but it is going to be very interesting to watch the reaction of the United States and the capital markets in general.

Australia’s free trade agreement with the United States appears to require that Australia give the US government the opportunity to negotiate directly with the Australian government if a US takeover offer is in danger of being blocked or heavily modified.

The side letter detailing the process is believed to have only been uncovered last week: it is unclear whether any discussions occurred, or what the US response will be.

Some were noting on Friday morning that the government had timed its announcement to coincide with America’s Thanksgiving holiday, when businesses and the government are shut down.

The capital markets didn’t react sharply to the news - the $A fell by about a half a USA cent, but then attracted renewed buying - and that is no surprise: warnings that there will an international capital strike over specific investment decisions of this kind are always overwrought.

They were being bandied around in 2001 before Peter Costello blocked Shell’s takeover of Woodside, and before Wayne Swan blocked the Singapore Exchange’s takeover of the ASX too, and proved untrue.

There were stronger national interest grounds for blocking the Woodside bid and the ASX bid, however. Shell was developing other liquefied natural gas projects in the region. If it owned Woodside, Australia’s North West Shelf liquefied gas project might have been delayed as Shell gave other projects priority.

The bid for the ASX would have put one of Australia’s key platforms for mobilising capital into the hands of the operator of a competing capital market.

This decision has less logic behind it, and a much heavier political tinge. International investors won’t sell out of Australia because of it, but they will now price in the risk that there will be more decisions like it.

The cost of attracting capital to Australia will edge up as a result.

Hockey says by the way that he is still inclined to let Archer Daniels buy more shares in GrainCorp, to boost its stake from just under 20 per cent to just under 25 per cent.

If it does so, it will be buying GrainCorp shares that have fallen in the wake of the Treasurer’s decision: will in effect be moving to a position of greater influence at GrainCorp without paying the control premium it was offering in the bid that has been blocked.

Clique