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GrainCorp gives ADM's bizarre China deal a chance to shine

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Archer Daniels Midland's bizarre bet on a Chinese bank might finally come up with the goods.

ADM's purchase in 2010 of a $100m stake in Agricultural Bank of China appeared to make little sense. Which was why questioned it at the time.

What business has a US-based grain trader buying stakes in one of China's big four lenders?

And, indeed, financially, Agricultural Bank has proved a pretty rotten investment.

Its shares closed in Shanghai on Friday 0.01 yuan below where they finished their first day of trading in July 2010, and have fared only little better in Hong Kong.

ADM would have been better off buying its own shares, which have risen 25% over the same period, and offers far richer dividends too.

Ministry minefield

But Agricultural Bank could find another way to pay back ADM's faith, which was, after all, given at a time when confidence was shaky in share investments, and especially in bank shares (making the grain trader's investment appear all the more curious).

ADM's $3.1bn purchase of GrainCorp, the Australia grain trader, agreed on Friday, will thanks to some quirky Beijing thinking require the blessing of regulators at China's Ministry of Commerce.

(Mofcom claims the power to review any merger in which the combined company would have $63m in Chinese sales and $1.5bn of world sales, a bigger net than it might appear.)

If Agricultural Bank can help ADM achieve swift handling by Mofcom, and a positive result, the lender could save the trader quite a headache.

Time penalty

After all, there is not only the strategic cost of merger delays to think of, if Mofcom takes the nearly 11 months to approve the GrainCorp deal that it did in signing off Marubeni's purchase of Gavilon earlier this week.

(And then with stringent conditions on soybean imports to China.)

There is also a potential financial bill to ADM.

GrainCorp saw Mofcom coming and, wisely, negotiated a clause giving its investors 3.5 Australian dollar cents a share for every month the ADM tie-up is delayed, beyond five months.

That equates to roughly $8m a month, or potentially $40m if Mofcom treats ADM-GrainCorp with the same lack of urgency it did Marubeni.

'Insight and experience'

Patricia Woertz, the ADM chief executive, in 2010 justified the group's Agricultural Bank bet by saying it allowed the groups "to benefit from the insight and experience of one another".

Now is the time for Agricultural Bank to prove its "insight", if the investment is to prove its worth.

By Mike Verdin

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