Marubeni’s swoop on a major U.S. agricultural trader goes with the grain. The Japanese trading conglomerate will pay around $5.2-billion (U.S.) including debt to acquire privately held Gavilon. The deal can be explained by the strong yen, commodity traders’ continuing quest for scale and expectations of China’s appetite.
Bigger is better for trading houses. They need ever-larger sums of capital to back their inventories as the cost of commodities rises. Prices for U.S. corn have doubled since 2010, and volumes of traded food commodities have been steadily rising over the last decade.
That’s driving even the most doggedly private commodity traders to rethink their capital structures. Switzerland’s Glencore raised $8-billion by listing in 2011, and offered to buy Toronto-listed agricultural firm Viterra for $6.1-billion in March. Louis Dreyfus is considering its first debt issue in 160 years.
Meanwhile, transaction prices are finding their level. Marubeni is paying around eight times this year’s expected EBITDA of $650-million for Gavilon, based on estimates shared with Reuters, roughly the same as Glencore paid for Viterra. Funding the deal won’t be as easy as first appears. While Marubeni had $9-billion of cash and bank deposits on its balance sheet at the end of March, it already has net debt of six times forecast EBITDA for 2012. Gavilon looks less indebted, with a ratio of under three times.
Fortunately, Marubeni has access to another rapidly appreciating asset: the yen. The rise in the currency, which is almost 8 per cent above its lows in 2011, has given Japanese corporate a strong incentive to do deals.
But the biggest motivation for such tie-ups lies in Japan’s backyard. As Chinese diets get richer, so its grain demands get bigger. While China only accounts for around 5 per cent of globally traded volumes of wheat and coarse grains, its imports have quintupled in 10 years to 11.8 million tons, according to the U.S. Department of Agriculture.
The convergence of Chinese economic development, a rising Japanese currency and capital pressures in commodity trading suggest this won’t be the last deal of its kind.