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Viterra, ABB Grain Come To Terms

“If (Viterra) did something else big after this, before this got some traction, then we think they might… bite off more than they can chew.”

– ANIL PASSI OF CREDIT RATI NG AGENCY DBRS

Canada’s top grain handler has agreed to buy Australia’s ABB Grain in a US$1.2 billion share-and-cash deal, giving Viterra better access to Asian markets.

Viterra’s proposed acquisition would add “meaningfully” to earnings in the first year, the company said on Tuesday, and could bring synergies of about US$23.3 million a year. Job cuts are not expected.

The combined company – the name of which has not been determined – would have the geographic advantages of crop supply from different hemispheres, hedging it against weather-related risk.

Buying ABB would likely help the Canadian company lower its transport costs by enabling it to ship grain through Australia to high-growth markets in Asia, instead of shipping directly from Canada.

Viterra CEO Mayo Schmidt said the deal would position the company well to supply Asia with imports of wheat, barley and canola, which he estimated would grow 39 per cent over 10 years.

“There’s quite a bit to feel good about and that’s the scale and diversification and the fact it’s being financed fairly prudently,” said Anil Passi, senior vice-president of DBRS, a Canadian credit rating agency.

The deal values ABB shares at A$9.11-A$9.41, a premium of up to 9.4 per cent from ABB’s last traded price. The offer includes a special cash dividend of 41 Australian cents, to be paid by ABB. Its shareholders’ options include cash and shares, cash only, or shares only.

DBRS said the larger scale and diversification from the acquisition, along with balanced financing, should allow Viterra to keep its current rating. Even so, DBRS is reserving judgment on the deal until it becomes apparent if Viterra is planning more acquisitions, Passi said.

“If they did something else big after this, before this got some traction, then we think they might… bite off more than they can chew,” he said.

Indeed, the new company may make further acquisitions based

on strong balance sheets and a low debt load, Schmidt said, with the most attractive targets being those in value-added grain processing.

There’s room on the balance sheet for the company to make further acquisitions in Australia such as Graincorp Ltd., analyst David Newman of National Bank Financial said in a note to clients.

Credit rating agency Moody’s is also reviewing Viterra for a possible downgrade, depending on final financing arrangements, but said May 19 that its rating would likely be confirmed.

ABB directors have unanimously approved the deal and recommended shareholders vote to approve it in the absence of a better offer.

Viterra attempted global expansion in 1996 when it was known as the Saskatchewan Wheat Pool. Its acquisitions in Poland and Mexico helped push the company almost into bankruptcy in 2003 before a new management team carried out the successful acquisition of Agricore United.

Canadian farmers remain fearful that as the grain-handling industry consolidates, they’ll have fewer options for sales, said Ron Bonnett, vice-president of the Canadian Federation of Agriculture.

The company was formed more than 80 years ago as a co-operative to give farmers an option for selling their crops.

“It’s a concern that we may forget some of the lessons of history but at the same time, farmers themselves don’t have deep enough pockets sometimes to play this game,” Bonnett said.

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