May 24, 2017 / 9:34 AM / 6 months ago

BREAKINGVIEWS-Glencore food binge could leave investors hungry

(The author is a Reuters Breakingviews columnist. The opinions expressed are his own.)

By Andy Critchlow

LONDON, May 24 (Reuters Breakingviews) - Glencore has fought hard for a lean balance sheet. Now it has one, it can keep things simple and give more money to shareholders, or binge on an acquisition. A merger approach to U.S. agricultural trader Bunge suggests Chief Executive Ivan Glasenberg favours the latter, somewhat riskier course of action. Such boldness could leave investors going hungry.

Bunge was lukewarm about the Swiss trading and mining group’s desire for a “consensual business combination” on Tuesday. Nonetheless, the U.S. company’s shares closed up almost 17 percent, giving the company a market capitalisation of $11.5 billion. Add in $3.8 billion of net debt, and it means a cash bid would cost at least $15.3 billion. It could cost even more: Glasenberg has previously shown a reluctance to back down too readily.

Bunge ticks a strategic box. Its agribusiness, which includes grains, oil seeds and sugar, would give Glencore more exposure to a low-margin but low-risk sector that is strongly pegged to global population growth. But more covetable are its physical silos and mills. Those become more valuable in periods when crop supplies are in abundance, as they are now.

The financial thinking is a bit fuzzy. On one hand, Glencore’s agricultural business, which would do the deal, is a joint venture held alongside two Canadian pension funds – so its debts don’t figure on the parent’s balance sheet. On the other, it’s unlikely Glencore Agriculture could buy something so big without help. Glencore would have to stump up cash, or see its 50 percent stake diluted.

And it’s not clear that would be worth it. Bunge is estimated to make $1.4 billion of operating profit in 2018. Tax that at its 26 percent rate, and the return on investment would be just 7 percent. Glencore could juice that up with cost savings: were it to cut half of Bunge’s selling and admin costs of around $1.4 billion, that return would rise to 10 percent. That said, cutting costs – insofar as it means axing jobs – isn’t exactly a popular trade in the United States right now.

So Glencore may be better off holding onto its money – and maybe even refraining from big shareholder payouts. Commodities prices have stalled and doubts over China’s economic growth still linger. Glasenberg might be wise to keep his resources safe in their silo.

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CONTEXT NEWS

- Glencore, the Switzerland-based commodity trader, said on May 23 that its agricultural business had informally approached U.S.-listed grain trader Bunge about a “possible consensual business combination”. The latter responded that it was “not engaged in business combination discussions” with Glencore.

- Last year, Glencore sold nearly 50 percent of its agricultural unit, Glencore Agriculture, to two Canadian investors, Canada Pension Plan Investment Board and British Columbia Investment Management, for a combined $3.1 billion.

- Bunge shares closed up 16.6 percent in New York at $81.70, giving the company a market capitalisation of about $11.5 billion.

- Glencore shares were down 0.7 percent by 1020 BST, at 290 pence.

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Editing by John Foley, Liam Proud and Bob Cervi

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