Archer Daniels Rated Neutral By Citi After Rejection Of GrainCorp Deal

By Mani
Updated on

Archer Daniels Midland Company (NYSE:ADM) received a Neutral rating from Citi following its Graincorp Ltd (ASX:GNC) (OTCMKTS:GRCLF) dea’sl rejection by the Australian government.

David Driscoll of Citi doesn’t believe ADM would call for a massive share repurchase following the failed deal.

Archer Daniels was to acquire GrainCorp

Earlier, Archer Daniels Midland announced that it had completed due diligence on Graincorp Ltd (ASX:GNC) (OTCMKTS:GRCLF) and would proceed with a recommended takeover offer. ADM indicated the due diligence had confirmed that the deal could meet its financial objectives of returns of 200 basis points or 2% above the company’s weighted average cost of capital in three years.

Archer Daniels Midland Company (NYSE:ADM) announced that it intended to make a cash offer to acquire the outstanding common shares of Graincorp Ltd (ASX:GNC) (OTCMKTS:GRCLF) for A$12.20 per share under the terms of the takeover bid implementation deed signed with the company.

While ADM is a large agricultural services company with over $80 billion in sales, Graincorp Ltd (ASX:GNC) (OTCMKTS:GRCLF) is the largest bulk grain handling company in the Australian east cost.

Australian government’s rejection

The Citi analyst points out that last week, the Australian government rejected Archer Daniels Midland Company (NYSE:ADM)’s A$3.4 billion acquisition offer for Graincorp Ltd (ASX:GNC) (OTCMKTS:GRCLF), citing the acquisition wasn’t in the best interest of Australia to allow the deal to proceed.

The analyst notes if Archer Daniels Midland Company (NYSE:ADM) had been successful in acquiring GrainCorp, the deal was to be accrue $0.20 to $0.30 per share immediately and providing $50 to 70 million in synergies beyond year 2 of the deal or an additional $0.05 to $0.07 per share in synergies.

The Citi analyst believes the deal would have provided significant visibility to EPS upside in ADM’s 2014. However, with no deal, the accretion has gone and consensus 2014 estimates are roughly appropriate, with Citi’s 2014 EPS at $3.20, while consensus at $3.22 per share.

David Driscoll of Citi notes the industry environment in Archer Daniels Midland Company (NYSE:ADM)’s Oilseeds processing and Agricultural Services operations turning positive following the harvest of a record 2013 U.S. field corp. However, the analyst believes the company will face modest headwinds in the corn starches and sweeteners business in 2014 due to renewed competition from cheap sugar substitutes.

Neutral rating

David Driscoll points that out ADM was never willing to do a massive share repurchase. Hence, the analyst believes that the chances of an over $1 billion share repurchase are remote. The analyst points out that each $1 billion of share repurchase would add 10c to EPS assuming no incremental interest expense.

Driscoll believes that ADM will simply hunker down with its excellent balance sheet and wait for some other overseas asset to become available.

With Archer Daniels Midland Company (NYSE:ADM)’s share price rising over 46.9% YTD, the Citi analyst anticipates only a limited upside for the stock over the next 12 months with a price target pegged at $45 compared to its last price of $40.25.

Accordingly, David Driscoll of Citi assigns a Neutral rating on Archer Daniels Midland Company (NYSE:ADM), as he believes ADM shares are fairly valued at current prices.

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