The Chain: Potential ADM Takeover of Bunge Carries Uncertain Supply Chain Impacts

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January 31, 2018

On January 19, the Wall Street Journal reported that ADM was considering making a hostile takeover bid for Bunge similar to Glencore’s unsolicited bid in May 2017 that led to Glencore and Bunge agreeing to a “standstill” agreement that prevents Bunge from further unsolicited bids. J.P. Morgan analyst Ann Duignan reported that this agreement “ends in the next few weeks,” at which point it is possible that Glencore and ADM may enter into a bidding war for Bunge. Since the announcement, last week ADM shares were up 7.7 percent and Bunge’s shares were up 5.5 percent versus gains in the S&P 500 of 2.2 percent. ADM also owns 24.9 percent of Wilmar International, the largest global palm oil trader.

Bunge had announced last September 2017 that it was acquiring a 70 percent controlling ownership interest in IOI Corporation’s Loders Croklaan specialty fats business for USD 946 million.

ADM, Bunge, ADM’s Wilmar investment, and Bunge’s Loders Croklaan investment all have significant deforestation supply chain commitments. The proposed acquisition would require integration of these four firms’ supply chain tracing and tracking tools. This could benefit the market as Wilmar’s No Deforestation, No Peat, No Exploitation upstream commitment and its public dashboard does inform key buyer Loders Croklaan’s ability to achieve its own NDPE commitment, positively impacting Loders’ EU market sales position.

Both companies have No Deforestation, No Exploitation (NDE) commitments for soy as well, but ADM’s commitment is more advanced and innovative as it also includes no deforestation of High Conservation Value and High Carbon Stock areas. Yet both have remaining gaps addressing excluding legal deforestation and providing full supply chain transparency from farm to mill. Chain Reaction Research highlighted these issues in its December 2017 report Bunge: Key Position in Cerrado State Puts Zero-Deforestation Commitment at Risk.

Anti-Trust Hurdles and Opportunities

Driving this flurry of potential consolidation is an environment of low interest rates coupled with the reality that currently the ABCD major agricultural trading firms ADM, Bunge, Cargill and Dreyfus are all facing tight margins, and greater supply chain scrutiny.

In January 2018, the EU Parliament voted in favor of a ban on the use of palm oil in biofuels from 2021, which would widen palm oil biofuels’ discount relative to other competitive products, possibly negatively impacting ADM’s Wilmar position. Basically, ADM may buy Bunge to compensate to compensate for a possible future decrease in palm oil-based biofuels profit. According to Bloomberg, 46 percent of the EU’s palm oil imports are for biodiesel, with total imports in 2017 up 5.1 percent year over year to 7.5 million metric tons.

Wilmar is also currently in a trade dispute with the U.S. Department of Commerce who announced in November 2017 countervailing duties on imported biodiesel from Indonesian and Argentina. The Government of Canada has challenged this decision, filing a complaint December 20, 2017 with the WTO December 20, 2017 citing over 200 examples of alleged U.S. wrongdoing, including the proposed U.S. countervailing duties against Argentinian and Indonesian biodiesel imports. In a potential preview of the case’s outcome, the WTO ruled on January 25 that the EU must decrease duties – which currently range from 8.8 percent to 20.5 percent – on Indonesian biodiesel imports.

Further complicating matters, it is not clear that the U.S. Department of Justice will approve significant consolidation in the trading industry through the pending ADM / Bunge consolidation play.

Even though ADM is roughly twice the size of Bunge via market capitalization, Bunge has 32,000 employees while ADM has 31,800 employees, so opportunities for further efficiency exist if ADM rightsized Bunge’s headcount towards ADM’s sales/employee ratio. ADM may be looking to increase its processing capacity outside the U.S. by adding capacity from Bunge, where it might find synergies with Wilmar’s global trading presence.

The value to ADM in purchasing Bunge might be to hedge ADM’s palm oil investment by increasing their global soybean capacity as traders often adjust their palm oil and soybean portfolios given which they can profit most on. The spread between the palm oil and soybean oil is also heavily impacted by currency exchange rates and weather-related issues. According to JPMorgan, given the dominant position both palm oil and soybeans play in food and bioenergy globally, by investing in global capacity in both palm oil and soybeans, the proposed ADM purchase of Bunge would strengthen ADM while allowing them to shed non-essential Bunge assets via direct sales and IPOs.

Dominant Market Position in Food and Dry-Bulk

According to Bloomberg Intelligence , the combined ADM – Bunge company (including ADM’s Wilmar investment) would be a super power in the world of agriculture traders. They would control 25 percent of the world’s soybean production, 20 percent of Brazil’s sugarcane production and 22.6 million tons of corn processing capability while becoming a global leader in palm oil trading.

The proposed acquisition would allow ADM/Bunge to use its palm oil commodities to hedge its soybean crop and vice versa. Given that changes in global weather patterns magnified by climate change have recently impacted both Indonesian palm oil production and Brazilian soybean production, the proposed company could mitigate these weather-related risks by increasing its market position in each sector.

Similarly, the combined ADM/Bunge company would be among the top five charterers in the world for bulk transport. Yet, they would still only be about 50 percent the size of Cargill’s dry-bulk fleet. While the acquisition would likely hurt dry-bulk shipping rates, it would increase ADM/Bunge’s pricing power.

Financial Comments

If allowed to proceed, ADM’s acquisition of Bunge would create significant scale in the South American, European and Asian markets and decrease overlapping excess capacity. The impact on consumer prices in uncertain yet market consolidation amongst numerous agriculture commodities will certainly draw regulatory attention.

One thing to watch is whether the acquisition would impact ADM’s ability to maintain its 25-year track record of increasing dividends to investors. Bunge currently trades at about USD 11 billion market capitalization meaning that ADM would have to go to the equity market to issue USD 8 billion to USD 8.5 billion in equity to fund the purchase of Bunge. This might dilute ADM’s earnings per share in the near–term, but integrating ADM’s value-added strategy  – including NDE supply chain commitments – with Bunge’s commodity strategy and market share could add value to the combined ADM-Bunge over the mid-term. The key is ADM’s ability to create uniform public supply chain dashboard that integrates NDPE information across its investment and trading partners.

Given that Bunge Limited is expected to report earnings on February 14, 2018 before market open and ADM is expected to report earnings on February 6, 2018 before the market opens, if the acquisition proceeds, expect a major announcement by ADM by February 6, 2018.  Either way, investors will learn soon if this is bluff by ADM to force Glencore to pay more for Bunge.

 

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