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Wylie tells Chanticleer that he views his role in the GrainCorp situation as that of a “friendly activist.”

He believes that this approach could be used in other situations to help companies that are the subject of a take-over bid to find alternatives to the usual binary position of either accepting an offer or rejecting it.

Wylie says his corporate restructuring plan would leave GrainCorp with an overall value of around $ 10 per share.

His proposal involves a split of the marketing, storage and logistics activities of volatile grains and the sale of the edible oils activities. This would leave a higher growth business focused on malt and bulk liquids terminals.

Wylie says the beauty of his proposal is that GrainCorp shareholders would avoid selling the entire company at the bottom of the cycle and keep the control premium of around $ 2.50 per share that should apply to the high malt business. quality and terminals.

LTAP offered $ 10.42 per share with an offering structure never seen before in the history of Australian takeovers. It has $ 3.32 billion in bridging funding from Goldman Sachs backed by a 25-year derivative transaction underwritten by global insurer Allianz.

This unique financial engineering package, in effect, removes volatility from the East Coast grain harvest and allows transaction debt to be securitized at investment grade.

“As a shareholder of GrainCorp with a significant stake to our balance sheet, Tanarra believes the (LTAP) proposal significantly undervalues ​​the company and is flawed in many respects,” Wylie’s letter states.

“As you know, in early November, we presented your managers with a proposal to restructure GrainCorp by separating the grain business (marketing, storage and logistics) from the rest of the GrainCorp group.

“We brought this forward because we believe the current corporate structure has led to a structural undervaluation of the company – an undervaluation that we believe LTAP is now seeking to profit from at the expense of GrainCorp shareholders.

“The essence of this structural undervaluation of the group in its current configuration is the extraordinarily high correlation of the GrainCorp share price with the Australian east coast grain harvest.

“The GrainCorp stock price has, in a nutshell, become a derivative game for short-term investors – most likely hedge funds and day traders – depending on weather factors and crop forecasts.”

Wylie argues in her letter that the bulk and liquid terminal business “should attract premium valuation multiples in the equity market if separated from the entirely different dynamics of the grain business.”

He says that as a long-term shareholder and value investor, Tanarra Capital had undertaken a detailed analysis of GrainCorp and its various businesses.

“We believe in the inherent value of the group,” says his letter.

“We are not investment bankers or management consultants seeking to collect advisory fees in cash. Our interests are fully aligned with those of all shareholders and as we have indicated to you and your colleagues , we present our views on a friendly and constructive basis after a very significant amount of exclusive and independent research. ”

Wylie says he’s concerned about the level of leverage of the LTAP offering and the risks posed by that, including the possibility that if unforeseen events did occur, losses would be socialized and profits privatized.

“This moral hazard is made even more acute by the fact that GrainCorp, as an organization serving Australian farmers, in our view benefits directly from the innate goodwill and support of Australian governments and philanthropic donors towards farmers for tough times like now on the east coast of Australia, ”the letter said.

Bradley confirms receipt of the letter and says the company’s board of directors is concerned about the broader implications of a highly leveraged offer.

He says that in an era of considerable focus on large corporations and their responsibility to the community, it was imperative that the board consider broader issues beyond maximizing value for companies. shareholders.

Bradley says he’s had conversations with Wylie for several months and that some of his ideas have already been incorporated into the company’s portfolio review of all of its assets.

Wylie’s intervention will increase pressure on LTAP to release details of its financial engineering, including debt covenants, Allianz insurance underwriting terms and conditions, and contingency plans. in the event of insolvency or any other catastrophic financial event. .

LTAP has made it clear on several occasions that it has the full backing of the two largest shareholders of the GrainCorp registry, Perpetual Investments and Ellerston Capital. They own about 30 percent of the business and may well decide its fate.

Wylie’s plan would take a long time to execute and that means shareholders would have to be patient in order to reach the $ 10 per share valuation proposed as part of his plan.

Wylie says that in the interests of transparency, investment bankers advising all parties to the GrainCorp takeover should disclose their fees so shareholders know how much of the value of an offer goes into costs.

In some ways, both Wylie and Shepherd have capitalized on the biggest weakness of GrainCorp’s business model: its exposure to the commodities cycle.

TONY BOYD

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