Top U.S. grains merchant Archer Daniels Midland Co (ADM.N) has proposed a takeover of Bunge Ltd (BG.N), The Wall Street Journal reported on Friday, a move that could set up a battle for Bunge with Swiss-based rival Glencore Plc (GLEN.L).
Large grain traders that make money by buying, selling, storing and shipping crops have struggled in recent years with a global oversupply. Thin margins have squeezed core commodity trading operations, including those of ADM, Bunge, Cargill Inc and Louis Dreyfus Co. Together the four are known as the “ABCDs” and dominate the global grains trade.
Consolidation is seen as one remedy. Glencore last year sought a tie-up with Bunge in what was viewed as a start of a wave of mergers and acquisitions in the industry.
The Journal quoted unnamed sources as saying that ADM had made the approach and that details were unclear.
White Plains, New York-based Bunge operates in more than 40 countries and is Brazil’s largest exporter of agricultural products, while Chicago-based ADM says it has customers in 160 countries.
Bunge, which has a market capitalisation of $9.79 billion, closed up 11.4 percent at $77.56 on Friday. ADM has a market cap of $22.64 billion.
ADM said it does not comment on “rumours or speculation” Bunge did not respond to requests for comment.
STRATEGY SHIFT?
Grain companies in recent years have expanded into higher-margin sectors, such as food ingredients and aquaculture, to offset weak results and wild swings connected to their traditional business of handling crops.
In 2014, ADM bought natural ingredient company Wild Flavors for about $3 billion in its biggest deal ever. The company has also broadened into handling healthy ingredients such as fruits, nuts and “ancient grains.”
“News of the ADM bid is a bit surprising given that ADM had been indicating the company’s strategic direction was more towards value-added rather the traditional commodities,” said Farha Aslam, analyst for Stephens Inc.
ADM is the most U.S.-focused of the major grain companies and a takeover would help it grow in South America, where Bunge is a major agricultural force.
ADM, which dates back to 1902, has tried to expand its international operations in part to take advantage of growing demand from China. In 2013, Australia rejected its attempted $2.55 billion takeover of Australian grain handler GrainCorp Ltd (GNC.AX) on concerns it could reduce competition.
Bunge was founded in Amsterdam 200 years ago. It moved its headquarters to South America as its operations grew in the region and relocated to New York ahead of an initial public offering in 2001.
HURDLES LOOM
Aslam estimated that fair value for Bunge in a takeover would be $90 to $95 per share. Morningstar said Bunge could go for about $90 to more than $100 per share.
Any tie-up would likely face stiff scrutiny from regulators and opposition from farmers who fear handing more market control to ADM could hurt prices paid for wheat, corn and soybeans.
The biggest overlap between ADM and Bunge in the United States is in grain origination and oilseeds processing, Aslam said. The companies would probably need to divest facilities in North America and also possibly in Europe, she said.
Aslam also said it was possible ADM and Glencore could partner in a bid for Bunge to split up its operations.
“ADM would take the more value-added downstream businesses and Glencore would own the more ag commodity businesses,” she said.
Glencore could not immediately be reached for comment.
A grain trading source said there is so much overlap of oilseed crushing assets between the two companies that the reported deal looks defensive – a way to keep Glencore from acquiring Bunge.
Bunge rebuffed Glencore last year, and the two struck an agreement that temporarily prevents Glencore from making a hostile bid, according to news media reports.
FARMERS RAISE WORRIES
An ADM-Bunge merger would also face opposition from farmer groups in key agricultural markets, including the United States, European Union, China, India and Brazil, said Erik Gordon, a professor at the University of Michigan’s Ross School of Business.
The companies’ relative tardiness in joining the big-agriculture merger game – following on the heels of DowDuPont (DWDP.N), Nutrien Ltd (NTR.TO) and others – would make gaining regulatory approval even tougher, Gordon said.
“When you’re the first one, there’s still more competition. Once they’ve let a few through, they may have second thoughts,” he said.
Grain farmers need five or six active buyers in order to get fair prices for their goods, but there are already only a handful, said Peter Carstensen, who teaches law at the University of Wisconsin at Madison.
“This is the kind of transaction that will screw farmers,” he said.
Illinois farmer Dan Henebry, who delivers corn and soybeans to ADM’s North American headquarters in Decatur, Illinois, said he was worried a takeover of Bunge could lead to grain handlers paying farmers less for their crops.
“We’ve had so many mergers,” Henebry said. “Less competition is not good.”
Source: Reuters.com