A takeover of Australia’s ABB Grains Ltd by Viterra Inc could transform the Canadian grain company into a global powerhouse, but it also runs the risk of repeating mistakes made in a previous attempt at foreign expansion.
Viterra, Canada’s largest grain handler, has offered up to A$1.64 billion (C$1.43 billion) for ABB, a major Australian grain handler and exporter.
Acquiring ABB would make Viterra a major player by opening marketing access to Asia and Australia, said Robert Winslow, an analyst at Wellington West Capital Markets.
“(Viterra) would have a significant presence on the global stage,” Winslow said in an interview. “People would stand up and notice.”
Buying ABB would give Viterra the ability to source grain from a second top grain-exporting country, Australia, National Bank Financial analyst David Newman said in a note to clients.
“(It) should solidify Viterra’s relationships with end customers as being the ‘go-to’ supplier for grain, including barley, wheat, and oilseeds. This definitely should aid the company’s marketing efforts.”
Viterra could also lower transportation costs by shipping grain from Australia into Asia, instead of from Canada, Winslow said.
But both analysts say crossing into a new domain brings risks – and Viterra’s track record with overseas holdings is not impressive.
“Operating on the other side of the planet can always make global transactions difficult, and many have tried and failed,” Newman wrote.
Viterra’s history underscores the difficulties of such long-range operations.
When the Saskatchewan Wheat Pool – a farmer-owned co-operative that was Viterra’s predecessor company – went public in 1996, it used its new capital to fund a flurry of foreign acquisitions including grain terminals in Poland and Mexico.
“It was done just for the sake of going big,” said Murray Fulton, a professor of pub-l ic policy at University of Saskatchewan. The foreign investments were failures and helped push the Wheat Pool into such steep losses that it came close to bankruptcy in 2003, he said.
The company restructured with new management, and several years later acquired Agricore United, a fellow Canadian grain handler. That deal has paid off because the company understood the type of asset it was buying and the culture it operates in, Fulton said.
Risks also lie in the scale of Viterra’s offer, analysts said.
The offer is a mix of cash, Viterra shares and dividends and was in the range of A$9 to A$9.50 per ABB share, ABB said.
Viterra said it will raise C$450 million in equity through a bought-deal subscription receipt offering, which is a share offering contingent on the deal going ahead.
Viterra has also said it has C$700 million available for growth.
Details of the ABB talks are sketchy, which makes it impossible to say if Viterra is overreaching its finances, Winslow said.
Viterra has said previously it sees the recession as an opportunity to make acquisitions because prices are dropping , but the offer value of A$9 to A$9.50 a share was sharply higher than ABB’s share price of A$7 before negotiations became public.
“The bottom line is Viterra may be paying up for this transaction,” Newman said. “… But for those who buy into the long-term agricultural story, being positioned in two of the leading grain export nations should help Viterra gain a very strong position in end markets.”