GrainCorp has agreed to buy rival grain handler AWB to create Australia's top wheat exporter – a Aus$2bn business billed as capable of taking on the foreign giants which have staked out the country's grain market.

GrainCorp is offering AWB investors one of its shares for every 5.75 of theirs in a deal billed as a nil-premium merger, judged by average share prices over the last months.

However, the underperformance of AWB shares means its investors will actually receive a 9% premium over the stock's closing price on Friday.

Alison Watkins, on her first day as GrainCorp chief executive, will take over the same post in the merged company, with AWB chairman Peter Polson retaining his role in the new group, which he termed Australia's biggest agribusiness.

'More competitive force'

Don Taylor, the GrainCorp chairman who will deputise for Mr Polson in GrainCorp-AWB, said that the combined business would "have the scale to compete more effectively against the large global grain companies now competing domestically, and exporting grain from Australia".

Royal Bank of Scotland analyst Belinda Moore said that the combined group would be a "more competitive force" in a "highly competitive market".

Giants including America's Cargill, Singapore-based Olam International and Germany's Toepfer have expanded into Australia, the southern hemisphere's biggest wheat exporter.

Canada's Viterra bought sector giant ABB Grain last year, and Sumitomo Corporation of Japan bought a stake in Emerald Group in March, and AWB itself was considering a deal with Gavilon, the US commodities giant back by George Soros's Soros Fund Management.

The GrainCorp merger, which "creates more value for shareholders" - and would release deal benefits of more than Aus$40m a year from measures such as cutting out duplicated costs -  supercedes the Gavilon tie-up, AWB said.

AWB added that it was still open to a "superior proposal", although this would trigger a 1% break-fee to GrainCorp.

Difficult times

The deal follows a troubled spell for AWB, Australia's former wheat export monopoly, and which has historically been the larger of the two companies.

The company lost its monopoly after an Iraqi bribes scandal, which ended with an agreement in February to pay Aus$40m to investors, and last year ran up  its worst ever loss as competitors, including GrainCorp, took over its turf.

AWB also on Friday announced its second profits warning of 2010, cutting to Aus$75m-95m from Aus$85m-110m it forecast for full-year earnings.

AWB shares closed 3.7% higher at Aus$0.99, with Graincorp stock ending 6.2% lower at Aus$5.65.