ViterraTROY FLEECE
Grain handler Viterra Inc. could offer intrepid investors one of the most attractive short-term returns available on the Toronto market, about 80 per cent on an annual basis.
But such a lush rate of profit is not without risk. The trouble is, you've got to hope that Chinese regulators are your friend.
Viterra is set to be acquired by the middle of next month by Glencore International for $16.25 a share. The stock has been changing hands recently for about $15.70. The deal is supposed to close in three weeks, so a profit of 55 cents per share over that brief period works out to the sizzling annual return mentioned above.
All the regulatory approvals, including the toughest ones, like the nod from Industry Canada, are in, but there is a sole exception. Because of Viterra's modest presence in the Middle Kingdom, the deal awaits a green light by China's Ministry of Commerce under that country's Anti-Monopoly Law.
In normal times, an approval for Viterra should be a rubber stamp, but these aren't normal times.
Viterra shares trade at a large discount to the bid price because of fears by market players that the takeover might be held hostage by Chinese regulators. The thinking is that they're awaiting Canada's judgment next month on the bid by China's CNOOC Ltd. for Nexen Inc. before making a decision.
If Canada doesn't approve the Nexen sale, the worry is that the Chinese will retaliate by blocking the Viterra takeover.
All of this is just speculation, of course, but the worries intensified after last weekend's unexpected decision by Ottawa to block the takeover of Progress Energy by Malaysian oil concern Petronas.
Much of the stock of Viterra is now held by U.S. takeover arbitragers – sophisticated investors who hold stock to earn the difference between lower market prices and the pending takeover prices in acquisitions.
Such activity is normally a low risk way of earning decent returns, but these holders were spooked after the Progress news and have been hitting the sell button all week.
It's easy to see why the arbs, as they're known, are getting antsy. If the deal blows up, Viterra stock will likely fall back to the $11 or $12 level, a slight premium to market levels before the takeover news in March.
On the other hand, if Chinese regulators do decide to scotch the Viterra deal, it would be hard for them to show that their action wasn't tit-for-tat politics.
Viterra owns a 49 per cent stake in a canola-crushing plant in south China. The investment is worth about $20-million to $25-million, so it shouldn't be the kind of holding that derails a $6.1-billion takeover.
Glencore has little in the way of China exposure, but Viterra is estimated to have about a 10 per cent to 15 per cent share of the malted barley and canola imports into the country, hardly enough to suggest serious monopoly concerns.
Viterra declined to comment on the size of its Chinese market share, but said the country is an "important export destination" for the two commodities.
There isn't a public timeline for when the Chinese might rule, but Viterra said it and Glencore "continue to engage with [China's Ministry of Commerce] to ensure approval as soon as possible."
Viterra's last communication to shareholders was comforting, but it came out before the latest foreign investment squabbles. Back in late September, it said the Chinese decision was being awaited and the "outside date for completion of the acquisition" was moved back by a month to Nov. 15.
If a decision isn't forthcoming soon, the two companies might have to extend again, something they can do under their merger agreement. But any additional delay would cut the returns of investors buying the stock hoping to profit from the transaction.