The Chain: Bunge Buys IOI’s Specialty Fats Business, Zero-Deforestation Policies Require Integration

On September 12, 2017, Bunge announced it will acquire a 70 percent controlling ownership interest in IOI Corporation’s Loders Croklaan for USD 946 million, comprising USD 595 million in cash plus EUR 297 million equivalent. IOI will retain a 30 percent ownership interest and customary protective rights. For the next five years, Bunge will the right to purchase the remaining 30 percent interest from Loders Croklaan. Likewise, IOI will have the same right to sell its remaining 30 percent interest to Bunge.

IOI’s CEO Datuk Lee Yeow Chor stated:

“In this respect, IOI will maintain our strong sustainability commitments as spelled out in IOI Group’s Sustainable Palm Oil Policy”.

“IOI will have two representatives on Loders’ five-member board of directors and our representatives will also be involved in key management decisions taken by Loders”.

Likewise, Bunge confirmed:

“Bunge and Loders are committed to sustainable sourcing, including zero-deforestation, zero peat conversion, protection of human rights, traceability and transparency. This transaction will combine leading policies, people, programs and partnerships from both companies. Bunge intends to continue its work as a member of The Forest Trust, increasing the sustainability of its supply chain and collaborating in projects that help advance industry performance. Following the close of the transaction, Bunge intends to base its palm oil sourcing on Loders’ policy.”

IOI will continue to be the main palm oil supplier to Bunge’s Loders going forward. As shown in Figure 1 (below), IOI has 150,129 hectares (ha) of mature oil palm trees. IOI’s extraction rates are also comparable to their competitors, such as Sime Darby, at 21.35 percent for crude palm oil and 4.81 percent for palm kernel oil.

Description Q2 2017 Q1 2017 Q4 2016 Q3 2016 Q2 2016
    Production (‘000 Tons)
        Crude Palm Oil (CPO) 173.952 138.297 184.598 194.337 152.877
        Palm Kernel 38.885 32.311 40.414 43.816 35.062
        Fresh Fruit Bunches (FFB) 799.778 655.274 827.579 872.997 717.484
    Extraction Rate (%)
        Crude Palm Oil 21.35% 20.62% 21.77% 21.75% 20.74%
        Palm Kernel 4.81% 4.78% 4.78% 4.90% 4.75%
    Area Planted (‘000 Hectares)
        Mature 150.129 148.764 147.095 147.077 148.166
        Immature 24.737 26.162 27.964 48.356 31.575
        Total Area Planted 174.866 174.926 175.059 195.433 179.741
        Total Titled Area Planted 217.917 217.917 217.917 217.917 217.917
    Yield per Mature Hectare (Tons)
        FFB Yield 5.44 4.49 5.71 6.02 4.92
        CPO Yield 1.16144 0.925838 1.243067 1.30935 1.020408
    Average Selling Price (USD/Ton)
        Crude Palm Oil  $639  $701  $640  $608  $622
        Palm Kernel  $621  $722  $667  $642  $581

Figure 1: IOI’s palm oil production statistics. Source: Bloomberg.

J.P. Morgan is the exclusive financial advisor to Bunge. Shearman & Sterling is Bunge’s legal counsel.

Bunge’s Financing

According to Bloomberg (paywall), Bunge entered into a USD 900 million, unsecured, delayed draw, three-year term loan agreement with Sumitomo Mitsui Banking Corporation. This loan may be used to pay for the purchase of Loders Croklaan.

Bunge dropped 4.31 percent on the announcement closing September 12, 2017 at USD 71.44.

IOI’s shares traded slightly higher up 1.98 percent closing at RM4.64 with volume at 17.6 million shares traded, 330 percent above average daily volume in 2017. IOI’s shareholders may get a special dividend of about USD 0.03 per share. IOI will use the revenue to expand its upstream operations.

Improving and Integrating Traceability to Plantation Dashboards: Operational Risk

The sustainability risk is that the sales of Loders to Bunge may decrease IOI’s downstream margins. IOI’s margins are high because Loders’ industry-leading specialty fats business includes over 300 patents and other processes the are accretive to margins. IOI will be left with much lower margin palm oil plantation, refining, and oleochemicals, which are price competitive, unlike specialty fats. While the sale cuts IOI’s net debt to 24 percent from 86 percent.

As shown in Figure 1 (above), Loder’s annual revenue of USD 1.6 billion on sales of 1.6 million metric tons of specialty fats implies an average selling price of USD 1,000 per ton compared with IOI’s average crude palm oil selling price of USD 639 means IOI will lose a high margin business from the sale.

The key sustainability concern is IOI will need to invest in processes to maintain its zero-deforestation commitments. But palm oil production is a lower margin business.

Finally, Bunge’s palm oil dashboard updated their zero-deforestation commitment on September 13, 2017. It reported it global traceability to its mills as 92 percent but Bunge also reported its traceability to plantations as only 14 percent. On the other hand, IOI’s dashboard reports it has 100 percent traceability to its mills with 51 percent traceable from plantation to mills.

Given that IOI just sold its high margin business to Bunge, and Bunge and IOI have both committed to maintain their zero-deforestation commitments – which means managing the operational risks of the plantation suppliers – they will both need to secure the funding to integrate their palm oil dashboards, which may be an added short-term cost.