January 22, 2018

Breakingviews: ADM Bite At Bunge Would Be Meal of Many Courses

by Breakingviews.

Bunge is a dish best carved before serving. The U.S. crops trader has attracted the attentions of rival Archer Daniels Midland, Reuters reported on Friday, raising the idea of a $30 billion-plus combination. It sounds financially palatable. But an offer would give rivals, customers, farmers, counterbidders and numerous governments a chance to spoil the recipe.

Condensing the agricultural trading market from four major players to three sounds like antitrust poison. Yet it’s not necessarily a killer. Morgan Stanley estimates the old gang of ADM, Bunge, Cargill and Louis Dreyfus have 65 percent of the market. But China’s COFCO has muscled in, taking over Nidera and bits of Noble Group. Market-share figures are, though, only of vague use given the intricacies of trade flows and the number of products involved.

What’s clear is that an ADM-Bunge blend could cut costs – and it would need to. Farmers’ habit of storing grain rather than selling it at the going price is making it more difficult for big traders to generate a proper return. For part of a supposedly clubby industry, Bunge’s return on capital of just over 6 percent, compared with its stated cost of capital of 7 percent, is pretty weak. The companies would surely deny a wish to push farmers around, but merging would at least give them a profitability buffer.

The fastest-acting opposition could be from Glencore, the Swiss trading house that made a soft offer to merge with Bunge last year. Glencore wants to get into low-risk agricultural trading and has set up a joint venture that would allow it to keep any debt from acquisitions off its own balance sheet. That suggests it won’t be deterred easily. An arrangement that sees Glencore take Bunge’s North American business, say, while ADM carries off Latin America, might create value for both bidders.

Even if Glencore doesn’t return, a clean merger of ADM and Bunge is unlikely. Whatever the actual effect on the market, antitrust authorities in grain-importing countries like China would tie the deal in knots just because they can. A more palatable alternative might be to achieve efficiencies through local partnerships or joint ventures. A blander recipe, but one that’s easier to get to the table.

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