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Tough times lead grain traders to consider merger

ADM has sought merger talks with Bunge.

by Mario Parker and Simon Casey 

The world of agricultural-commodity trading could be upended with the merger of two of its biggest names. Archer-Daniels-Midland Co. has sought deal talks with Bunge Ltd., a person briefed on the matter said at the weekend. That’s less than a year after Glencore Plc approached Bunge about a deal.

What ADM-Bunge Would Look Like

While they’re not exactly household names, ADM and Bunge have been around for 116 years and 200 years respectively and are among the very largest buyers and sellers of grains and other crops. But both companies do a lot more than that: they crush soybeans, produce vegetable oil and supply biofuels -- ADM even has a unit that manufacturers flavors. So, on paper at least, a combined ADM-Bunge would be both a commodity-trading giant, with an international network of barges and marine terminals, and a major industrial enterprise with factories and refineries.

Where they really differ is geographic footprint. Bunge has a much larger presence in South America, while ADM is bigger in the U.S. Combining the two would create a company that, at least in terms of revenue, would be approaching the size of Cargill Inc., the largest agricultural company.

ADM Bunge Cargill

Revenue* t$61.3b $46.2b $109.7b

Ebitda* $2.44b $1.27b $5.77b

Employees** 32,544 32,000 150,000

* ADM, Bunge data for 12 months through September; Cargill for 12 months through May.

** ADM, Bunge totals for 2016.

Source: Bloomberg.

Why Now? 

First, times are tough for crop traders. A glut isn’t only depressing prices but also sapping volatility, which is bad news for grain merchants like ADM and Bunge, as well as Cargill and Louis Dreyfus Corp., the four storied trading houses known in the industry as the ABCDs. "Bunge is the smallest of the four traders and they’ve struggled to turn around the ship,” Seth Goldstein, an analyst at Morningstar in Chicago, said in a telephone interview. 

ADM last year cut jobs and reshuffled management, while White Plains, New York-based Bunge slashed its profit guidance several times and unveiled a plan to eliminate $250 million in costs. A merger is an obvious way to accelerate and deepen such savings. Soren Schroder, Bunge’s chief executive officer, acknowledged last year that industry consolidation may be needed amid such challenging conditions.

Second, ADM is likely to be acting on the knowledge that Glencore could come back again after its initial approach.

What’s Next? 

ADM or Bunge have declined to comment on their potential merger. All eyes are also on Glencore, which up till now has been prevented from making a renewed approach to Bunge because of a standstill agreement. Could this turn into an auction for Bunge? For a company that is known for its aggressive and prolific dealmaking, Glencore is notable for almost never making a hostile takeover offer. It’s worth remembering, too, that Glencore saw off interest from ADM to acquire Canadian grain handler Viterra Inc. in 2012.

What Price a Deal?

Bunge shares jumped 11% on Jan. 19 after ADM’s interest was first reported, giving it a market value of $10.9 billion (for comparison, Chicago-based ADM’s market capitalization is $22.9 billion). They were up 3.1% at $79.99 at 11:11 a.m. in New York.

While Bunge’s stock has yet to revisit the highs seen last year, there may be limited upside. Glencore bought Viterra for 10.1 times the Canadian company’s Ebitda, while Bunge is currently valued at 13.1 times earnings, according to data compiled by Bloomberg. Bunge could fetch anywhere from $90 to $100 a share, analysts from Citigroup Inc., Credit Suisse Group AG and the Vertical Group said in reports Monday.

Antitrust Challenges 

If an ADM-Bunge tieup were to happen, regulators are likely to take a close look at the combined company’s market share, especially in its domestic market. There could be criticism from farmers, just like there has been with another agricultural mega-merger, Bayer AG’s acquisition of Monsanto Co. Department of Justice lawyers have sought out farmers who are opposed to that deal.

--With assistance from Javier Blas.

To contact the reporters on this story: Simon Casey in New York at [email protected]; Mario Parker in Chicago at [email protected]

To contact the editors responsible for this story: Simon Casey at [email protected]

Alexander Kwiatkowski

© 2018 Bloomberg L.P

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