Canada’s largest pension fund agreed to pay $2.5 billion for a minority stake in Glencore Plc’s agriculture unit as the commodity trader and miner works to reduce its debt burden.
Canada Pension Plan Investment Board will acquire a 40 percent stake in the division which handles wheat, corn, barley, biofuels, cotton and sugar, according to a statement on Wednesday. The deal places an equity value on the entire business at $6.25 billion. Citigroup Inc. valued it at $10.5 billion in September last year.
The price “was the low end of our valuation range, but it is not necessarily a disappointment,” said Ben Davis, an analyst at Liberum Capital Ltd. in London who advises holding the shares. “Cash through the door remains key for Glencore.”
The sale is part of a debt-cutting program Glencore Chief Executive Officer Ivan Glasenberg unveiled last year in a move to mitigate concern about the company’s capacity to pay down $30 billion of debt as commodity prices tumbled. Canada Pension fended off other bidders that included Asian and Middle Eastern sovereign wealth funds and the state-owned Saudi Agricultural and Livestock Investment Co.
Glencore shares slipped 1.2 percent to close 140.10 pence in London. The company’s 588 million euros of notes maturing in April 2021 rose 1.8 cents on the euro to 93 cents, the highest since September, according to data compiled by Bloomberg.
The price “is lower than market expectations based on discussions with investors,” Goldman Sachs Group Inc. analyst Eugene King, who has a hold rating on the stock, wrote in a note to clients. The cash will help lower debt, but it will have minimal impact on the critical net debt to Ebitda ratio assessed by ratings agencies, he said.
JPMorgan Chase & Co. described the transaction as a “solid but not spectacular outcome” while Bank of America Merrill Lynch called it “better than expected.”
Glencore has an option to sell as much as 20 percent more in the business. Both Glencore and CPPIB can call for an initial public offering after eight years from the deal closing, expected to be in the second half of this year.
Mark Jenkins, the global head of private investments at Canada Pension, said he expected another partner to acquire the additional 20 percent stake in the near term.
"It’s to their benefit to have other relationships," Jenkins said in an interview. "We think we’re a great partner, and we’re going to be a great partner going forward. But there’s always value in bringing a bit of diversity around the table."
Canada Pension has expanded into agriculture over the past three years by acquiring farmland in the U.S. and Canada, Jenkins said. The industry provides stable, long-term returns and exposure to global trends of population growth and the rising middle class, he said. The new stake provides an opportunity to expand in agriculture and add to Glencore’s business through acquisitions, particularly in the U.S. and Australia, according to Jenkins.
Glencore became a major agriculture player when it agreed to buy Canadian grain handler Viterra Inc. for C$6.1 billion ($4.6 billion) in 2012. With global network of more than 200 storage facilities and 23 ports, the company buys products from farmers, processors and other suppliers and sells to customers including local importers and government agencies.
The unit has gross assets of $10.2 billion and generated earnings before interest, taxes, depreciation and amortization of $734 million last year.
As the commodity collapse intensified in 2015, Glencore fought to reduce its debt burden, which totaled $25.9 billion at the end of last year, by scrapping its dividend, closed mines and sold $2.5 billion of new shares. Last month, the company pledged to cut net debt to as low as $17 billion and raise as much as $5 billion from selling assets.
“CPPIB have a proven track record in the sector and share our vision for the future growth of the business through value-creating organic and inorganic growth opportunities,” Glasenberg said in the statement.
The transaction caps three years of intense deal making in the agriculture industry. Last year, Mitsubishi Corp. paid just over $1 billion for a 20 percent stake in food trader Olam International Ltd. Marubeni Corp., one of Japan’s top-five trading houses, bought U.S. grain merchant Gavilon Holdings LLC for $2.7 billion plus debt in 2013.
Cofco Corp., China’s largest food company, spent more than $4 billion over two years to build a global grain trader. It acquired the grains and oilseeds unit of Noble Group Ltd. and a majority stake in Dutch trader Nidera BV.
Glencore’s agriculture business “is now well-placed to take advantage of the significant opportunities that are expected to emerge across the sector in the coming years,” Mark Jenkins, senior managing director and global head of private investments at CPPIB, said in the statement. Agriculture is an “excellent fit” for a long term investor, he said.
Barclays Plc, Citigroup Inc. and Credit Suisse Group AG were joint financial advisers to Glencore. CPPIB was advised by Deutsche Bank AG.
Peter Grauer, chairman of Bloomberg LP, the parent of Bloomberg News, is a senior independent non-executive director at Glencore.