April 8, 2019

Australia’s Grain Corp announced it plans to restructure and split its business, spinning off its malting unit, which accounted for more than half of the company’s earnings last year, after drought caused cuts to the volumes of grain being delivered to and handled by the company.

By splitting the company, Grain Corp believes the move will unlock significant value, resulting in separate units with discrete structures and the ability to better attract investors who have specific priorities.

It also said that it expects annual savings of approximately A$10 million (US$7 million) through integrating New GrainCorp’s grain and edible oil businesses, and another A$10 million (US$7 million) in savings generated by “business simplification initiatives” resulting from the spin-off.

The de-merger will create two independent companies: one will be MaltCo, a free standing maltster that will rank fourth in the world with malting operations in the U.S, Canada, Australia, and Britain, including Country Malt Group, the company’s North American craft malt distribution business, serving the whisky, specialty malt, and craft beer industries.

It also comes only weeks after GrainCorps made news in the first week of March when it agreed to sell its Australian Bulk Liquid Terminals (ABLT) business to ANZ Terminals Pty Ltd. in a deal valued at A$350 million (US$248 million).

Included in the deal were eight sites for the storing and handling liquid fats and oil, fuels, and chemicals located across Australia with a combined storage capacity of 211,000 cubic meters.

Originally acquired by GrainCorp in 2012 as part of its deal to acquire the edible oils business Gardner Smith, the sale of the assets is part of GrainCorp’s strategic business review announced in December 2018.

Once on its own, MaltCo will be the largest malting company in Canada, with assets consisting of malting plants in Calgary, Montreal, and Thunder Bay, nine elevators across three Prairie provinces, and Country Malt plants in British Columbia and Ontario; all of which fall under Calgary-based Canada Malting, producing 400,000 tons of malt per year.

The second, New GrainCorp, will be an Australian domestic and international grain handling, storage, trading, and processing company focused on grains and edible oils that will be backed by a derivative scheme to mitigate further risk from situations such as drought.

“Our Portfolio Review made clear that these businesses have different characteristics and would benefit from operating separately,” said Mark Palmquist, CEO, GrainCorp. “A demerger would provide both MaltCo and New GrainCorp with increased flexibility to implement independent operating strategies and capital structures and allow them to attract investors with different investment priorities.”

At the same time, the company said that it will continue to engage with potential buyers for either all or parts of the company, including Long-Term Asset Partners (LTAP), which made a takeover offer of US$1.69 billion in December of last year. However, at this point, GrainCorp has not received an updated offer from the firm.

Newly formed LTAP is backed by Goldman Sachs Group, and has been launched as an asset manager for a trust benefiting Australian investors. It is headed by former president of the Business Council of Australia, Tony Shepherd, and by former CEO of rail freight company Aurizon Holdings Ltd., Lance Hockridge, along with directors Andrea Stains and Chris Craddock, and former ADM executive director and GrainCorp general manager of ports, Nigel Hart.

Once the split is complete, MaltCo, which has EBITDA of $170 million in fiscal year 2018, said it will target “…further developing its international portfolio including by building on the growth of the recently expanded 220,000 metric tonne Pocatello malting plant in Idaho, United States, and the current 79,000 metric tonne expansion of capacity in Inverness and Arbroath, Scotland.”

The company goes on to state that given the “substantial growth” being experienced by the specialty malt, whiskey, and craft beer markets, it will target a dividend payout ratio of between 60 and 80 percent underlying NPAT, and will “…target maintaining a strong investment grade capital structure, with a policy of maintaining a ratio of net debt to EBITDA of no more than 2.0 – 2.5 times.”

New Grain Corp, whose assets generated EBITDA of approximately A$125 million (US488.8 million) is also expecting to experience multiple benefits from the de-merger, including expanded footprints in Canada, Ukraine, and India; expansion in organics; operational improvements in stock management; grains cost reductions; new rail contracts; and supply chain integration and improved asset utilization.

The de-merger is scheduled to be implemented by the end of this calendar year, at which point, current GrainCorp CEO Mark Palmquist will step down to become managing director and CEO of MaltCo.

-Lynda Kiernan