Glencore Agri seen as taking new steps toward Bunge takeover

Share

Bunge Ltd.'s cool response to takeover interest from Glencore Agriculture, a Swiss-Canadian company whose ambition is to become one of the world's biggest grain traders, should not be interpreted as pulling up the drawbridge.

That is the view of some analysts and Olivetree Financial, a British-American broker and consultancy whose clients include hedge funds and other investors. While Glencore Agri and Bunge are not officially talking, they expect the two sides to discuss a deal that could lead to a takeover.

Together, Bunge and Glencore Agri would create the world's second-largest agriculture trading group, behind Cargill Inc. of the United States. Glencore Agri is about equally owned by Glencore AG of Switzerland, the world's biggest mining and metals trader, and two pension funds – the Canada Pension Plan Investment Board, with 40 per cent, and the British Columbia Investment Management Corp., with 9.9 per cent.

"The strategic incentive for Glencore Agri to do the deal remains high as Bunge would help to fill geographic voids in both the U.S. and parts of South America," said Vivek Channamsetty, executive director and analyst at Olivetree. "Bunge's weak corporate defences and lack of aggressive push-back suggest that a path could exist to a consensual deal."

The shares of New York-listed Bunge rose 16 per cent on May 23, after Glencore Agri confirmed it had made a takeover approach for the trading company, whose roots go back almost 200 years to Amsterdam.

Since then, shares have lost some ground, but, at more than $78 (U.S.), are still substantially higher than their $70 price before the approach was made, suggesting investors are not ruling out a deal of some sort.

Olivetree thinks Glencore Agri would have to open with a big premium – 25 per cent or more – merely to entice Bunge to consider takeover talks. Neither Glencore Agri or Glencore is commenting on a possible takeover manoeuvre, but Glencore chief executive Ivan Glasenberg (who has no executive role at Glencore Agri) has made it clear he covets Bunge.

"We always said that we want to grow in [the United States and South America]; that's why we made the approach to Bunge," Mr. Glasenberg told an audience recently at the St. Petersburg International Economic Forum. "It is very big in the U.S. and big in South America, so we believed it would have been a good fit."

Bunge itself has shown no interest in losing its independence. In a short statement in May, Bunge, which is based in White Plains, N.Y., said it "is not engaged in business combinations discussions" with either Glencore or Glencore Agri, and is committed to executing its global strategy "for driving growth and value creation."

But analysts note that even though Bunge is theoretically an easy target – it is widely held and is considered a "shareholder friendly" company – it has not put up its defences in spite of Glencore Agri's approach, although it has appointed JPMorgan Chase as an adviser. For example, no poison pill has been put in place to deter aggressive investors from building a stake big enough to force Bunge's management to pursue a takeover offer, a restructuring or a share buyback that might boost value.

In a June 7 report, Robert Moskow, research analyst at Credit Suisse, said "we find it hard to believe that the company would walk away from a compelling offer." He said he puts a 50-per-cent probability of Bunge shares reaching $98 through a Glencore Agri takeover.

At the current share price, Bunge is worth $11-billion. A takeover premium of 25 per cent would boost its value to almost $14-billion, although the premium might have to be much higher. A bidding war, should one emerge, could tack billions more onto the sticker price.

Bunge is one of the four big agri-business companies collectively known as "ABCD" (Archer Daniels Midland, Bunge, Cargill and Louis Dreyfus). They trade commodities such as grain and oilseeds, and store and transport them using global networks of elevators, rail lines and fleets of cargo ships.

Glencore Agri is much smaller than Bunge. Buying it would turn Glencore Agri into a global player overnight.

Chris Mahoney, Glencore Agri's CEO, said the company is No. 4 in grains and oilseeds, ahead of Dreyfus, but the numbers are hard to verify because Glencore Agri is private and publishes scant financial information. Last year, the company reported adjusted EBITDA – earnings before interest, taxes, depreciation and amortization – of $592-million on revenue of $22-billion. Cargill, the biggest private company in the United States, reported fiscal 2016 sales of $107.2-billion, making it the world's top agricultural commodities trader and processor.

In an interview in April in Rotterdam, where Glencore Agri is based, Mr. Mahoney said the United States represented a "significant gap" in the company's global portfolio. A private Olivetree report noted buying Bunge would add enormous heft to Glencore Agri's U.S. portfolio. About 20 per cent of Bunge's assets and 24 per cent of its sales come from the United States. The two Canadian pension funds bought into Glencore Agri last year, collectively paying $3.12-billion for their half share in the company, with the expectation that it would expand, possibly through a transformational deal like the one in 2012, in which Glencore Agri bought Viterra, Canada's biggest grain handler. Viterra was formed by the 2007 merger of the Saskatchewan Wheat Pool and Agricore United.