GrainCorp keeps some crafty malt ties to ease demerger pain

GrainCorp stake in United Malt will help balance sheet

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The booming craft beef market will continue to give GrainCorp some future financial security, despite the planned split from its profitable malt business

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The booming global craft beer market promises to continue offering drought-battered GrainCorp some future financial security, despite the company's impeding split from its profitable malt business.

Australia's biggest listed agribusiness is set to be carved into two companies next month, but GrainCorp won't entirely cut its ownership ties with its newly created sibling, United Malt Group.

Assuming shareholders vote for the split, GrainCorp will retain a 10 per cent share in the US-based malt operation.

This will provide a modest, but useful, extra income stream, plus share capital which could be liquidated if needed at a later date.

Interestingly, however, GrainCorp directors initially hoped not to have any lingering investment link with the big maltster, despite the benefits it could inject into the parent company's balance sheet.

United Malt has enjoyed sturdy growth in North America thanks largely to the strength of the craft beer market, which blossomed in the past decade.

In the US the craft beer market continued to grow in 2018 at four per cent, which is on a much bigger base than five years ago - Mark Palmquist, GrainCorp

Chief executive officer, Mark Palmquist, said some US states were still under-represented in the craft beer boom and offered particularly good growth opportunities, while emerging markets such as Latin America and Asia were also seeing strong premium and craft beer growth.

The craft production process requires about twice as much malt as mainstream commercial brewers for every litre of beer it produces.

GrainCorp owns 13 malt processing plants in Australia, Britain and North America.

Its American business, Country Malt, also has 11 North American warehouses providing the craft beverage sector with ingredients, while another subsidiary, Brewcraft USA, has five sites servicing the flourishing home brew market.

"In the US the craft beer market continued to grow in 2018 at four per cent, which is a lower rate than previous years, but still good growth on a much bigger base than five years ago," Mr Palmquist told last week's annual general meeting.

At the same time the Scotch whisky industry, another big malt buyer, was experiencing good, high value consumer demand.

Single malt whisky was showing particularly strong growth and was a market the malt business would continue focusing on.

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Mr Palmquist said the reborn United Malt company was also in a good position to explore opportunities to expand its warehouse and distribution network's geographic spread, and grow its specialty malt customisation and innovation skills.

Chairman, Graham Bradley, also believed the malt venture's prospects and strong cash flow should ensure United's shares attracted investors when the company listed on the Australian Securities Exchange if the split went as planned after a March 16 exceptional general meeting.

Why only 10pc stake?

Yet, when shareholders asked why GrainCorp was not keeping a bigger stake in the malt company to take advantage of the malt business' bullish outlook, Mr Bradley said ideally the company may not have had kept any shareholding.

"If we had less core debt we may not have retained any stake," he conceded.

"The aim was to make it as small as possible, and 10pc was the right balance."

Despite recently selling off most its liquid bulk terminal assets for $333 million, GrainCorp will still carry $82m in core debt after the demerger.

The 10pc stake in United Malt would therefore provide additional "balance sheet resources and financing flexibility" to the seasonally-exposed grain handler, marketer and oilseed processor.

Any more may have been considered a blocking stake - Graham Bradley, GrainCorp

"The 10pc shareholding helps with managing that carryover debt, so it (GrainCorp) will not be adversely affected in bad years," he said.

"Any more may have been considered a blocking stake.

"For example, if there was at some point a decision within United Malt to accept a takeover offer, we did not want United to be in a situation where GrainCorp still held too large a stake."

The small parcel would be a useful non-core asset, generating some dividend revenue, and could be monetised in what Mr Bradley felt would be a ready market for GrainCorp's stake, especially as the holding was not too big to offer to the market in one go.

New directors' direction

Meanwhile, GrainCorp shareholders voted to confirm the appointment of new director, Jayne McAloon, who will move to United Malt after the split, joining re-elected director, Simon Tregoning, and Barbara Gibson and Mr Bradley who will all shift to the malt business, with Mr Palmquist.

They will be joined by a fifth and new director, Terry Williamson, to be appointed in March.

Ms McAloon, a former high flying executive with BHP Billiton and AGL, has a 25-year background in the resources, energy infrastructure and utility sector.

Another new recruit and former wool, wine and pork industry financial management specialist, Kathy Grigg, was confirmed as a GrainCorp board member last week, joining long serving directors Don McGauchie, and Dan Manglesdorf and current deputy chairman, Peter Richards who will replace Mr Bradley as chairman.

The AGM also saw the retirement of directors Peter Housden and Rebecca Dee-Bradbury who have been with GrainCorp for 11 and five years respectively.

Mr Bradley said the boards of the two demerged companies would be smaller than the current GrainCorp director team, reflecting their smaller market capitalisation.

However both companies would monitor and develop the expertise and skills required, and "facilitate an orderly succession for long-serving directors".

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