Could Bunge Be an Encore for Glencore?

May 24, 2017 09:14 AM

Gillian Tan is a Bloomberg Gadfly columnist covering deals and private equity. She previously was a reporter for the Wall Street Journal. She is a qualified chartered accountant.

Glencore is ready for an encore. 

Some four years after the commodities giant completed its merger with Xstrata Ltd., the Swiss company has honed in on its next multi-billion dollar target: Grain trader Bunge Ltd. Glencore Plc confirmed news reports that its agriculture joint venture made an informal approach regarding a "possible consensual business combination" with White Plains, New York-based Bunge, sending its shares 17 percent higher late Tuesday. 

Buying Bunge would help the commodities trader and miner expand its presence in the less-volatile business of agriculture, an area from which it was forced to retreat when it needed to shore up its balance sheet. 

The transaction's logic is clear: Glencore has been a notable absentee in the ever-important U.S. grain market, where it was thought to go next after its 2012 purchase of Canada's Viterra Inc.  But such a move was soon thwarted as the company grappled with falling commodity prices and a massive debt burden. Rather than being in a position to expand its agriculture arm, the company sold nearly 50 percent of it to two Canadian pension funds in separate transactions that closed in December, in part because it was one of the only businesses for which willing buyers (at a fair price) even existed. 

But now after energy and most metal prices rebounded, Glencore's debt load has become more manageable and it's poised to be flush with cash.

As my Bloomberg Gadfly colleague Chris Bryant highlighted in February, Glencore's Chief Executive Officer Ivan Glasenberg boasted there was room for a $20 billion dividend payout. Since then, he's obviously had a change of heart about how the company should spend its loose change. 

Bunge's lowly valuation may have served as a lure: Earlier this month, the company's shares plunged more than 11 percent after it posted disappointing earnings and slashed its full-year profit forecast. Even factoring in Tuesday's jump following confirmation of the deal approach, Bunge is trading at a forward enterprise valuation-to-Ebitda multiple of just 8.8, a discount to rivals Archer-Daniels-Midland Co. at 9.6 at and less than the roughly 9.5 multiple Glencore paid for Viterra. (It'd still need to fork out an additional premium, so a deal multiple could end up being in line with these.)

Another probable driver of the transaction? The likely willingness of Glencore's agriculture joint venture partners -- Canada Pension Plan Investment Board and British Columbia Investment Management -- to put additional cash to work. 

Although the joint venture is seeking friendly rather than hostile talks, it's notable that Bunge is more vulnerable as a target because its shareholders voted in 2016 to declassify its board -- a maneuver that will go into effect at the company's annual meeting later this week. (By definition, classified, or staggered, boards provide protection against certain abusive takeover tactics and more time to solicit higher bids in a hostile takeover situation because it is more difficult to change a majority of directors on the board in a single year.)

It's early days still, and deal terms remain unknown. But as long as Glencore offers a price that isn't overly opportunistic, the so-called ABCD foursome -- Archer-Daniels-Midland, Bunge, Cargill Inc. and Louis Dreyfus Co. -- may soon see its acronym blown up.

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