GrainCorp splits: Malt division to list on ASX by year's end

GrainCorp Malt to list on ASX as independent business

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Newly named MaltCo will focus on global malting and craft brewing distribution markets headed by Mark Palmquist

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GrainCorp is to demerge its big money making global malting business, listing it as an independent business on the Australian Securities Exchange later this year.

The newly named MaltCo would continue to focus on its key strengths in global malting and craft brewing distribution markets.

With the big eastern states grain company under pressure from major shareholders as drought in Australia undermines the malt division's solid contribution to group profits, GrainCorp chairman, Graham Bradley, said a demerger would unlock significant shareholder value by "establishing two unique and high quality ASX-listed agribusinesses".

At the same time GrainCorp was continuing to engage actively with aspiring suitor Long-Term Asset Planners and other parties who had expressed an interest in acquiring parts of the GrainCorp portfolio.

However, Mr Bradley said the company had received no recent definitive update from LTAP, which began inquiries about buying the business last October.

A demerger would provide both MaltCo and the new GrainCorp with increased flexibility to implement independent operating strategies and capital structures and allow them to attract investors - Graham Bradley, GrainCorp

There was still potential for GrainCorp, MaltCo or other portfolio businesses to be sold, potentially delivering a control premium that may deliver even greater value to current shareholders, Mr Bradley said.

The malt business demerger plan leaves GrainCorp's remaining legacy business to focus on its domestic and international grain handling, storage, trading and processing grains, oilseeds, pulses, edible oils and feeds.

"With focused management teams we will be able to pursue independent strategies and growth opportunities," Mr Bradley said.

GrainCorp managing director, Mark Palmquist, said the company's portfolio review during the past 18 months made clear the malt and grain handling and oil businesses had different characteristics and would benefit from operating separately.

"A demerger would provide both MaltCo and the new GrainCorp with increased flexibility to implement independent operating strategies and capital structures and allow them to attract investors with different investment priorities," he said.

The GrainCorp board was continuing to assess any proposals received from interested parties keen to pitch for the some of the company's extensive grain handling, logistics, processing or marketing assets, with the objective of maximising value for shareholders.

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If the proposed demerger, via a scheme of arrangement, gets shareholder and regulatory approval, the new MaltCo would continue to operate as the world's fourth largest independent maltster with a portfolio of malting houses in the United States, Canada, Australia, and the United Kingdom.

The MaltCo division generated earnings before interest, tax depreciation and amortisation of $170 million last financial year.

Mark Palmquist

Mark Palmquist

Mr Palmquist is set to become MaltCo's managing director, although remain as GrainCorp chief executive officer until the demerger is completed.

However, in light of his intended appointment to the MaltCo board, he would resign from GrainCorp's board and his role as managing director.

Pamminger new MD

Current GrainCorp group general manager for grains, Klaus Pamminger, has been appointed as GrainCorp's chief operating officer, and, on demerger, would succeed Mr Palmquist as managing director of the new GrainCorp.

Although creating MaltCo as a separate, listed company would involve some incremental corporate costs, it was expected these would be more than offset by cost reduction initiatives to be implemented in MaltCo in the first year after demerger.

GrainCorp's malt business also operates Country Malt Group, a leading craft malt distribution business in North America.

The malt division had benefited from having high quality, low operating cost processing assets strategically located in premium barley growing regions.

"These assets have benefited from significant historical investment and are expected to require stay in business capital expenditure of $15-20m a year," a company statement said.

MaltCo agenda

"MaltCo's strategic focus will be on further developing its international portfolio, including by building on the growth of the recently expanded 220,000 tonne Pocatello malting plant in Idaho, United States, and the current 79,000 metric tonne expansion of capacity in Inverness and Arbroath, Scotland.

One of GrainCorp's malt warehouses in Scotland.

One of GrainCorp's malt warehouses in Scotland.

"The specialty malt, whisky and craft beer markets which MaltCo services are experiencing substantial growth and MaltCo will be established with sufficient balance sheet flexibility to support the capital investment required to capture these growth opportunities."

MaltCo would maintain 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.

MaltCo was also expected to target a dividend payout ratio of between 60 per cent and 80pc of underlying net profit after tax, delivering attractive returns to MaltCo shareholders.

If the demerger is implemented, GrainCorp shareholders would receive MaltCo shares in proportion to their shareholding in GrainCorp, while also retaining their GrainCorp shares.

New GrainCorp

Following the demerger, the "New GrainCorp" would be an integrated global agribusiness with grain handling, storage, trading and processing operations in Australia, New Zealand, North America, Asia, Europe and Ukraine, focused on grains, oilseeds, pulses, edible oils and feeds.

The slimmed-down GrainCorp business would continue to operate the largest grains storage, transport and marketing network in eastern Australia as well as Australasia's largest integrated edible oils business.

Its strategic focus was on building and developing its global grain and oilseeds origination network, including through ongoing investment in the GrainsConnect Canada supply chain and growth into new markets in the Black Sea and Indian subcontinent.

GrainCorp was also targeting the domestic, on-farm and niche grains markets, including organics, as growth opportunities.

GrainCorp's storage and logistics infrastructure assets include 145 country receival sites, with 20m tonnes of storage capacity and seven Australian bulk grain export terminals.

This infrastructure plays a critical role in the eastern Australian grain export supply chain.

"In addition to an ongoing focus on supply chain efficiency and the reduction of fixed costs, New GrainCorp is also evaluating the potential of utilising a grain production derivative instrument ("Grain Derivative") to reduce cash flow volatility linked to grain harvest volumes," the company said.

GrainCorp's Newcastle bulk shipping terminal in NSW

GrainCorp's Newcastle bulk shipping terminal in NSW

"Should such a structure be agreed, New GrainCorp would receive cash flow protection where production is lower than an agreed threshold, in exchange for an annual fixed fee and payments to the derivative counterparty where production is above an agreed threshold."

Grain derivative plans

GrainCorp had received an executed indicative term sheet for a long-term grain derivative from a leading global insurer.

Entry into this grain derivative remains dependent on, among other matters, negotiating satisfactory full form documentation.

"This work is ongoing, however execution of the grain derivative is not a requirement for GrainCorp to proceed with the demerger of MaltCo," the company said

"After the demerger, New GrainCorp will target maintaining an investment grade capital structure.

"Further details of the New GrainCorp capital structure, including gearing and dividend policies along with any distribution of the proceeds from the sale of the Australian bulk liquid terminals, will be released once the sale of the Australian bulk liquid terminals has completed and evaluation of the proposed Grain Derivative has been finalised.

"The assets comprising New GrainCorp generated FY14-FY18 average EBITDA of about $125m before corporate costs.

Grain business benefits

"New GrainCorp is also expected to benefit from a range of initiatives already being delivered by the Grains business unit, which are expected to increase 'through-the-cycle' EBITDA by $55-80m/year, consisting of:

› Operational improvements in grain stocks management ($10m/year- completed)

› Grains cost reduction initiatives ($15m/year annum - completed)

› New rail contracts ($10-15m a year - benefits commencing FY20)

› ECA supply chain integration / improved asset utilisation ($10-20m/year - implemented, full benefit from FY20)

› Expanded international footprint in Canada, Ukraine and India and expanding organics ($10-20m/year - underway).

Demerging MaltCo will enable and accelerate a number of business process simplification and cost reduction initiatives across New GrainCorp - GrainCorp

"In addition, the oils business unit expects to increase EBITDA by $15-25m with ongoing benefits from foods, improvements to management of crush margin and the Numurkah expansion.

"The demerger of MaltCo will also enable and accelerate a number of business process simplification and cost reduction initiatives across New GrainCorp.

Savings initiatives

"These initiatives are expected to deliver an annualised cost reduction of approximately $20m. They include:

› The integration of the grains and oils business units within New GrainCorp to eliminate duplication of costs and right-size corporate support functions (approximately $10m/year implemented within the next 6-9 months)

› Core business simplification initiatives resulting from separation of MaltCo (approximately $10m/year, implemented within the first year following demerger).

"As a result of the significant historic capital investment in the east coast grain storage and logistics infrastructure assets as well as the processing assets in the oils business, New GrainCorp's future stay-in-business capital expenditure is expected to be approximately $35-45m/year in a normal season."

The company was engaging with the Australian Tax Office in relation to demerger tax relief for the distribution of MaltCo shares to GrainCorp shareholders as part of the demerger.

GrainCorp would advise on progress with its demerger tax relief application in due course and has promised to keep shareholders informed on the progress of the demerger.

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