March 12, 2012 / 6:53 PM / in 6 years

Glencore seen in hunt for grain handler Viterra

ZURICH/WINNIPEG, Manitoba (Reuters) - Glencore GLEN.L is one of a handful of parties eyeing a takeover bid for Viterra VT.TO, Canada’s largest grain handler, a Swiss-based industry source said on Monday, and Ottawa signaled it was keeping an open mind on any possible deal.

Viterra, with a current market value of around $5 billion, said on Friday it had received expressions of interest from unnamed third parties for a possible takeover, sending its shares up more than 20 percent.

Shares of the Regina, Saskatchewan-based company gained a further 6 percent on Monday in Toronto, reaching their peak after Canada’s industry minister suggested he was open to a possible foreign takeover.

“Unlike the opposition, our government understands the importance of attracting foreign investments to our economy,” Industry Minister Christian Paradis said in the House of Commons. “Foreign investments help Canadian companies to grow and innovate and provide new opportunities to connect our firms to the world. Our government will continue to welcome investment that benefits Canada.”

Paradis was responding to a question from an opposition legislator who asked if the government would intervene if it can’t clearly prove a takeover of Viterra was in Canadians’ best interests.

Agriculture Minister Gerry Ritz was more guarded about Viterra, when asked about the government’s stance by the House of Commons’ agriculture committee, saying: “I will not speculate on any takeover at this point.”

Taking control of Viterra would give Swiss-based Glencore access to Canada’s prized canola, spring wheat, oats and durum wheat supplies. Canada, the world’s leading exporter of each crop, is due to end a grain marketing monopoly in August that could give a big lift to Viterra’s business.

“It’s a very attractive asset, but it’s also very large - so there aren’t a lot of players who can write big checks,” said Greg Pearlman, head of BMO Capital Markets food and consumer group, at the Reuters Global Food and Agriculture Summit in Chicago. “It’s hard to handicap right now.”

A non-Canadian bid for Viterra, which also owns almost all the grain terminal space at ports in South Australia, could face regulatory hurdles in Ottawa, with its reputation for resource nationalism. That could discourage prospective suitors.

Glencore, which is also pursuing a 23 billion pound ($36 billion) takeover of miner Xstrata XTA.L, already markets and produces crops, as well as metals, minerals and oil.

The trading house - the world’s largest diversified commodities trader - has long said it planned to expand in agricultural commodities.

It held unsuccessful talks last year with Louis Dreyfus, a leading player in the farm sector. It was also named earlier this month as one of several suitors circling Gavilon Group, a U.S. energy and grains trader.

“Glencore clearly want to fill that hole in their portfolio. When things didn’t seem to be going well with Dreyfus, they had to look around,” the source said.

Glencore would have little trouble paying for Viterra, Pearlman said, adding that U.S.-based Cargill, Canada’s third-largest grain handler, Archer Daniels Midland, Bunge, as well as Wilmar International Ltd and Mitsui in Asia, and Louis Dreyfus in France also have ample means.

A much smaller list could afford to buy both Viterra and Gavilon, and Glencore would be on it, Pearlman said. Depending on what premiums to shares are offered, Viterra could go for $6 billion to $7 billion, while Gavilon, which is accepting bids, might fetch $3 billion to $4 billion, he said.

Buying both would be roughly the equivalent of Bunge’s market capitalization, for example, he said.

Even though Cargill and ADM are cutting costs following weaker quarters, Pearlman said he doubts such conditions would dissuade any company from making a strategic buy like Viterra.

“This is a very, very unique asset, it’s publicly held and has lots of elements that are not replicable.”

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For graphic on Viterra assets:

link.reuters.com/zys96s

For graphic on Viterra’s Canadian retail assets:

link.reuters.com/bat96s

For graphic on Viterra’s Canadian grain handling network:

link.reuters.com/cat96s

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Interest in Viterra comes as the Canadian Wheat Board’s 69-year-old marketing monopoly over Western Canadian wheat and barley is set to end in August.

A law passed by Parliament last year to end the CWB monopoly would allow Viterra and others to buy grain directly from western farmers for the first time in decades, likely fattening their earnings.

GOVERNMENT REVIEW

Still, a non-Canadian bid for Viterra, which has its roots as the farmer co-operative Saskatchewan Wheat Pool, may trigger political opposition.

As well, any foreign takeover of a Canadian company with an asset value of C$330 million ($333.72 million) or more is subject to a government review to determine whether it is of “net benefit” to the country.

Brad Wall, premier of Viterra’s home province of Saskatchewan, told reporters in Regina that if there were a foreign bid, his government would do an “aggressive” study of whether the takeover would benefit Saskatchewan, and make a recommendation to Ottawa.

“We don’t have a position. If there is a takeover (attempt) we would take a very thorough analysis and the measure we would use is: Is this a net benefit to Canada and to Saskatchewan? Period.”

Saskatchewan’s opposition to a foreign bid for Potash Corp of Saskatchewan POT.TO in 2010 is widely seen as convincing Ottawa to block that takeover.

Wall said he would consider the fiscal impact on the Saskatchewan government and economic impact on the province more generally, but does not consider Viterra a “strategic resource,” as it did Potash Corp. “This doesn’t fit our own definition of a strategic resource.”

Because of Viterra’s size, a takeover - whether by a domestic or foreign concern - would also face a review by the federal Competition Bureau, although monopoly concerns would likely be more acute if domestic players Cargill or Richardson International were to bid. Viterra owns nearly half of the grain-handling capacity in Western Canada.

Louis Dreyfus, which has said it is expanding its grain handling capacity in Canada, last year downplayed talk of acquisitions. It declined to comment on Viterra.

U.S. agribusinesses Archer Daniels Midland ADM.N and Bunge BG.N could also make offers, although any non-Canadian suitor must take into account Ottawa’s 2010 decision to block a bid by Anglo-Australian miner BHP Billiton for Potash Corp, the world’s largest fertilizer maker, said Robert Winslow, an analyst at National Bank Financial, in a note to clients.

Because of that high-profile rebuff, foreign suitors for Viterra will likely involve Ottawa in their plans early, Winslow said.

“We argue there is risk of the federal government complicating any potential deal,” Winslow said.

BMO analyst Joel Jackson said Canada’s Agrium Inc AGU.TO, the largest North American agricultural products retailer, may emerge as a suitor. Viterra’s farm-supply assets might make a neat addition to Agrium’s own retail network, he said.

Agrium has a large retail footprint in the United States, but a fairly small presence in the farm belt in Western Canada where Viterra owns more than 250 stores. The two companies both have retail outlets in Australia.

Jackson said he would expect Agrium to bid only for Viterra’s agri-products business or sell off the grain handling side if it acquired the entire company.

Agrium and Bunge were not immediately available for comment, while ADM has said it would not comment.

EYE ON NORTH AMERICA

Glencore is one of the leading exporters of grain from Europe, the former Soviet Union and Australia. It commanded almost 9 percent of the global market for grains at the time of its initial public stock offer last May. It has looked to North America as an area for growth, particularly for agricultural infrastructure, such as country elevators to buy grain.

“Viterra would fit this infrastructure-heavy criteria and would give it a dominant entry point in North American agriculture, a market where it currently has negligible presence,” analysts at Liberum said in a morning note.

Glencore began trading agricultural commodities three decades ago with the acquisition of a Dutch trading company. Its farm products arm now deals in wheat, maize and barley to oilseeds, cotton and sugar.

For Western Canadian farmers, a foreign takeover of Viterra - whose roots date back to 1924 - would evoke some “sentimental” reaction, said Alberta farmer Humphrey Banack, a vice-president of the Canadian Federation of Agriculture.

The more pressing fear on the farm is that a Viterra takeout by an existing Canadian player could lead to consolidation of the grain-handling sector, leaving farmers fewer options of where to sell their crops, he said.

“Hopefully we don’t see much more consolidation because we’re already moving grain a lot farther than we had to in the distant past, and we’re hoping those costs don’t come back to us today,” Banack said.

Glencore shares were up 0.7 percent at 409.08 pence in London, while Viterra stock added 6.4 percent to C$14.45 in Toronto on Monday afternoon.

($1=0.6372 British pounds)

($1=$0.99 Canadian)

Additional reporting by Clara Ferreira-Marques, Victoria Howley and Nigel Hunt in London, Randall Palmer in Ottawa and Euan Rocha in Toronto. Graphics by Euan Rocha; Editing by Frank McGurty and Peter Galloway

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