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Glencore-Bunge deal would add G to ABCD dominating grain

May 24 2017 07:23
Javier Blas, Dinesh Nair and Shruti Date Singh, Bloomberg

London – Glencore’s takeover approach for US grain trader Bunge highlights how much the Swiss commodity giant is longing to increase its dominance in the Americas and bust up the stranglehold exerted on the industry by four key players.

Glencore said in a statement on Tuesday it approached Bunge about a potential “consensual business combination” and there’s no certainty that a deal will happen. Shares of the US company surged, giving it a market value of $11.5bn. Bunge later said it isn’t engaged in “business combination discussions” with Glencore or the company’s agriculture unit.

A combination, if it happens, would create one of the world’s largest agricultural traders, with assets in locations including Brazil, Australia, Russia and Canada. It would be a powerhouse in soybeans, wheat and sugar, with a large presence in the trade flows between Latin America and food importing nations such as China.

The deal would also mean a sea change in an industry that for the past century has been dominated by the so-called ABCD quartet of Archer-Daniels-Midland, Bunge, Cargill and Louis Dreyfus.

“It’s an acquisition for corporate strategy” rather than synergy, Steve Laveson, a portfolio manager for Becker Capital Management in Portland, Oregon, said in a telephone interview on Tuesday. Becker owns more than 630 000 shares of Bunge.

US hunt

It’s no secret that Glencore, led by billionaire Ivan Glasenberg, has been on the hunt for assets in the US grain industry. Glencore’s Chris Mahoney, who runs the agriculture unit, said in an interview with Bloomberg News published earlier this month that the company was having trouble finding “willing sellers.” Within a day of those comments, Bunge CEO Soren Schroder indicated to analysts on an earnings conference call that his company would be open to participating in industry deals.

“I think it’s very much ABCD and G now," Mahoney, 58, said in the interview at his office in central Rotterdam, just inland from Europe’s biggest port. Glencore is already the world’s largest wheat trader and biggest merchant of pulses such as chickpeas.

Olympian expands Glencore’s empire with emerging food colossus

The deal would give Baar, Switzerland-based Glencore access to Bunge’s vast networks of trucks, barges and elevators, including infrastructure throughout North and South America. Almost 40% of Bunge’s long-terms assets are in Brazil, where Glencore has expanded through a purchase earlier this year of a sugar mill.

Shares of Bunge closed 17% higher at $81.70 on Tuesday after Glencore confirmed its interest, the stock’s biggest gain since 2008. Bunge’s shares drifted to $78.95 in after-hours trading before Bunge’s statement saying it wasn’t in talks with Glencore.

“Bunge is committed to continuing to execute its global agri-foods strategy and pursuing opportunities for driving growth and value creation,” the White Plains-based company said in the statement.

Glencore may have to pay more than $100 per share to buy Bunge, Vertical Research said in a report.

‘Attractive company’

“People look at us just like we look at everybody else every day," Schroder said in an interview earlier this month. "I am not surprised. We are a very attractive company.”

Several years of commodity price declines have helped spur the series of mega-deals currently reshaping the seed and chemical industry, including Bayer’s planned acquisition of Monsanto and Dow Chemical’s merger with DuPont.

In contrast, the grain-handling industry has seen relatively little deal-making over the period. ADM stands out as the exception, with the Chicago-based company selling its stake in GrainCorp, eastern Australia’s largest grain handler, after its takeover bid was blocked. It now ranks as the largest shareholder in palm oil-grower Wilmar International.

“Consolidation is desperately needed,” and would be “constructive” for margins, Heather Jones, a Richmond, Virginia-based analyst for Vertical Group, said in a telephone interview on Tuesday. “Bunge seems the most obvious target. It’s more digestable than some of the other properties out there.”

Glencore deals

The last time there was a round of mergers in the industry, it wasn’t the ABCDs that led the way, but Glencore, which bought Canadian grain merchant Viterra for C$6.1bn ($4.5bn) in 2012, and Japan’s Marubeni, which acquired Gavilon Group for $2.6bn the following year.

Glencore spun off its agriculture unit after its existential crisis in late 2015 when commodity prices plunged and debt concerns sent the stock tumbling to a record low. In part to weather the storm, Glencore sold 49% of its agriculture unit to two pension funds - Canada Pension Plan Investment Board and British Columbia Investment Management - for $3.1bn.

The sale created a new company with its own balance sheet, which isn’t guaranteed by Glencore itself. The business reported earnings before interest, taxes and depreciation, attributable to Glencore, of $592m last year, compared with $830m for Dreyfus, the smallest of the ABCD companies.

Mahoney, who won a silver medal in rowing at the Moscow Olympics in 1980, attempted another big agriculture deal in 2011, exploring a merger with Louis Dreyfus. The companies, after several weeks of talks, were several billion dollars apart in valuation and the deal never happened.

Disclosure: Peter Grauer, the chairperson of Bloomberg, is a senior independent non-executive director at Glencore.

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