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GrainCorp's pursuit of rival CBH ticks a lot of boxes

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GrainCorp's support for the consortium bidding for rival Australian grain handler CBH Group ticks a lot of boxes.

Sure, there is no guarantee that GrainCorp - which bungled its last bid for a domestic competitor, AWB, in 2010 – will succeed this time either.

For CBH to accept a bid from the Australian Grains Champion consortium, which GrainCorp joined on Tuesday, would require support from 75% of voting members – a big hurdle.

But the way the deal is structured gives GrainCorp, a big name in the east coast Australian market, a fighting chance of getting its fingers on its west coast peer.

Big prize

Australian Grains Champion is proposing an upfront payment of Aus$600m in cash to CBH's owners, which comprise some 4,200 Western Australian grain growers, who will retain a shareholding too.

That equates to an average of Aus$140,000 apiece – a tempting windfall to farmers in a difficult time for the industry.

And the kind of rewards they might feel will be a long time coming from CBH in its existing form.

The co-operative last month unveiled a 45% drop to Aus$82.7m in earnings for the year to the end of September.

Cross-country

And, assuming Australian Grains Champion gets its way, getting into CBH offers GrainCorp a lot more than just a passive investment.

As GrainCorp said, the deal "creates substantial potential to enhance the alignment and strategic relationship" between the two grain handlers.

In what has become a fiercely competitive market, GrainCorp could, uniquely, boast fingers in big grain handling pies on both sides of the country.

Yet in limiting its stake to that of a "significant minority investor", estimated roughly at 20%, GrainCorp reduces the potential for the deal to get tripped up by anti-trust regulators.

Eye on the US

The deal may carry defensive benefits for GrainCorp too.

The group may also have an eye on staying clear of the clutches of its biggest investor, US-based Archer Daniels Midland, which is believed to retain an interest in buying the Sydney-based group, after its last attempt, in 2013, was blocked by the Australian government.

The then Australian treasurer, Joe Hockey, cited the need to encourage competition to GrainCorp, rather than having its clout increased even further by ADM's backing.

That argument that has weakened with the strengthening of rivals as Nidera, which has gained backing by Chinese giant Cofco.

But for GrainCorp to link up with CBH might not only make it a bigger mouthful for ADM but, in creating some appearance of a domestic leviathan, and give fresh legs to Mr Hockey's argument too.

By Mike Verdin

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