CHICAGO, Ill. (Reuters) — Shares of Bunge Ltd rose to a 22 month peak May 24 after merger overtures by Glencore Plc.’s agriculture unit, which owns Viterra in Canada, whetted investors’ appetite for consolidation in the commodities sector.
News that Glencore Agriculture Ltd., jointly owned by Glencore and two Canadian pension funds, approached Bunge sparked the U.S. agribusiness’s sharpest rally in more than eight years.
A deal with Bunge could transform Glencore into a major force in the U.S. agriculture sector and would make the Swiss company’s Canadian joint venture the latest foreign entity to own of a piece of the U.S. food chain.
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Bunge, the world’s largest oilseed processor, later said it was not in talks with Glencore and remained committed to its growth strategy of expanding into higher-margin products, such as natural food ingredients and specialty edible oils.
Bunge has worldwide operations. In Canada it has five oilseed crushing plants and it is a minority shareholder in G3 Global Holdings, which is the majority investor in grain handler G3 Canada Ltd.
Bunge’s lukewarm response to a “possible consensual business combination” suggests that a two-pronged merger and acquisition approach for agribusinesses may be in the offing, analysts said last week.
Grain trading veterans such as Bunge, Archer Daniels Midland Co and Cargill Inc., which already have a sizable U.S. presence, are aiming up the supply chain with specialty, higher-margin products. The companies, along with Louis Dreyfus Co., are known as “the ABCDs” of global grains trading.
Meanwhile, players like Glencore and China’s Cofco Group are eager to gain a foothold in the United States — the world’s top agricultural products exporter — and other key production areas in South America, where Bunge dominates.
“If you want to be an ABCD, you have to buy one,” said Kansas State University agricultural economist Jay O’Neil.
“You cannot go out and recreate these kinds of international trading operations organically.”
Merger expectations have swirled around large grain traders for months following a string of poor earning results as low crop prices and a global glut of grains squeezed core commodity trading operations.
JPMorgan analyst Ann Duignan said she was surprised that Bunge struck a “relatively dismissive tone” on the Glencore deal because its “core businesses remain under pressure, with agribusiness margins weighed down by burdensome supplies of crops in all producer regions.”
Glencore head Ivan Glasenberg said the company wants to expand its agriculture business but has no plans to move into any commodities in which it does not already trade.
“There is a push to get more into the supply chain without going all the way to being branded food products,” said Chris Johnson, lead agribusiness credit analyst at Standard & Poor’s.
Bunge, with a nearly $11.5 billion market cap, could sell for a 10-times multiple, which would imply a transaction value of about $90 per share, said Morningstar analyst Seth Goldstein.
Glencore Agri is one of the world’s largest suppliers of sugar, wheat and pulses. It also trades cotton, corn, barley, soybeans and other crops.
In 2015, Brazil-based JBS SA bought Cargill’s U.S. hog business. Two years earlier, Shuanghui International Holdings Ltd. struck a deal for Virginia-based Smithfield Foods, the world’s largest pork producer. Hong Kong-based WH Group now owns Smithfield.
Germany’s Bayer AG plans to acquire U.S.-based Monsanto Co., the world’s biggest seed maker, as part of a wave of consolidation in the seed and agrochemical industry that could shrink six large companies into four.
However, the shakeup among grain traders may look entirely different.
“It’s a large, disparate industry and it took economies of scale to get these companies to where they are,” said Gary Blumenthal, president of World Perspectives Inc.
“But how much further can it go? I don’t see it working like it has in ag chemicals.”
