Originally from the Australian Financial Review
John Wylie and Tony Shepherd, two of the best connected businessmen in Australia, are now going head-to-head in the $3.3 billion GrainCorp takeover battle after Wylie put forward a plan to restructure the company.
Wylie provided an outline of his restructuring proposal in a letter to GrainCorp chairman Graham Bradley on Wednesday. In his letter he revealed that his investment house, Tanarra Capital, is a shareholder in GrainCorp.
His move is potentially highly disruptive for two reasons. First, it could derail the highly leveraged bid by Shepherd’s Long Term Asset Partners, which is backed by Goldman Sachs and Allianz.
Second, it could turn on its head the highly lucrative traditional investment banking model whereby intermediaries get paid fees to maximise share price returns.The fact that one of the most successful investment bankers of the past 20 years is willing to offer his services for free as part of his alignment with shareholders is extraordinary. Investment bankers have done work for free before but usually through charitable foundations.
Wylie tells Chanticleer that he regards his role in the GrainCorp situation as that of a “friendly activist”.He thinks this approach could be used in other situations to help companies under takeover offers to find alternatives to the usual binary position of either accepting a bid or rejecting it.
Wylie says his corporate restructuring package would leave an aggregate value for GrainCorp of about $10 a share.
Wylie says the beauty of his proposal is that shareholders in GrainCorp would avoid selling the entire company out at the bottom of the cycle and retain the control premium of about $2.50 a share that should apply to the high quality malt and terminals businesses.
LTAP has bid $10.42 a share with an offer structure never seen before in Australian takeover history. It has a $3.32 billion bridging finance from Goldman Sachs backed by a 25 year derivative transaction underwritten by global insurer Allianz.
This unique financial engineering package, in effect, removes the volatility from the east coast grain crop and allows the debt in the transaction to be securitised at an investment grade rating.
“As a shareholder of GrainCorp with a shareholding that is material to our balance sheet, Tanarra believes the (LTAP) proposal substantially undervalues the company and is flawed in numerous respects,” Wylie’s letter said.
“As you know, in early November we presented to your executives a proposal for the restructuring of GrainCorp through the separation of the grains (marketing, storage and logistics) business from the rest of the GrainCorp group.
“We put this forward as we believe the current corporate structure has led to a structural undervaluation of the company – an undervaluation which we believe LTAP is now seeking to profit from at the expense of GrainCorp shareholders.
‘The essence of this structural undervaluation of the group in its present configuration is the extraordinarily high correlation of the GrainCorp share price to the Australian east coast grain crop.
“The GrainCorp share price has, in a nutshell, become a derivative play for short-term investors – most likely hedge funds and day traders – based on weather factors and crop predictions.”
Wylie argues in his letter that both the bulk and liquid terminals businesses “should attract premium valuation multiples in the equity market if separated from the entirely different dynamics of the grains business”.
He says that as a long-term shareholder and value investor Tanarra Capital had undertaken detailed analysis of GrainCorp and its various businesses.
“We believe in the value inherent in the group,” his letter says.
“We are not investment bankers or management consultants seeking to be paid cash advisory fees. Our interests are completely aligned with those of all shareholders and as we have indicated to you and your colleagues, we are putting our views forward on a friendly constructive basis after a very substantial amount of proprietary and independent research.”
Wylie says he is concerned with the level of leverage in the LTAP offer and the risks posed by this, including the possibility that if unforeseen events occurred losses would be socialised and profits privatised.
“This moral hazard is made even more acute by the fact that GrainCorp, as an organisation serving Australian farmers, in our view benefits directly from the innate goodwill and support of the Australian governments and philanthropic donors towards farmers during times of hardship, such as now on Australia’s east coast,” the letter said.
Bradley confirms receipt of the letter and says the board of the company is concerned about the broader implications of a highly leveraged bid.
He says that at a time of considerable focus on big business and its responsibility to the community it was imperative for the board to consider broader issues beyond maximising shareholder value.
Bradley says he has had conversations with Wylie over several months and some of his ideas have already been worked into the company’s portfolio review of all its assets.
Wylie’s intervention will crank up the pressure on LTAP to release details of its financial engineering, including covenants attached to the debt, the terms and conditions attached to the Allianz insurance underwriting, and the contingency plans in the event of insolvency or some other catastrophic financial event.
LTAP has repeatedly made clear that it has the full support of the two largest shareholders on the GrainCorp register, Perpetual Investments and Ellerston Capital. They own about 30 per cent of the company and could well decide its fate.
Wylie’s plan would take quite a period of time to execute and that means shareholders would have to be patient in order to achieve the $10 a share valuation put forward under his plan.
Wylie says that in the interests of transparency the investment bankers advising all parties in the GrainCorp takeover should disclose their fees so that shareholders know how much of the value in a bid is going in costs.
In some ways both Wylie and Shepherd have honed in on the greatest weakness in the GrainCorp business model: its exposure to the commodity cycle