A New Crop of Ag-Stock Deals?

Bunge's $4.4 billion deal to buy Corn Products could signal a new round of consolidation. Could ADM be the next big player to make a move?

by David Bogoslaw

With corn prices soaring (BusinessWeek.com, 6/18/08) since the floods in the Midwest put an estimated 3.3 million acres of crops under water, it's not surprising that companies with global reach and, more important, financial strength are looking to solidify their position in this increasingly vital market.

That's likely part of the rationale for food conglomerate Bunge's (BG) plan to buy Corn Products International (CPO) in an all-stock deal announced on June 23 and valued at $4.4 billion, or $56 for each share of Corn Products. The purchase price includes the assumption of roughly $414 million of Corn Products' net debt.

At a 31% premium to Corn Products' closing price of 42.90 on June 20, the acquisition isn't cheap, but analysts think it's positive for both companies. Corn Products gains access to a global logistics and distribution network without which the regional company would have had little chance of surviving. For its part, Bunge gets to broaden its business to include refined products such as corn sweeteners and starches that command higher margins. That will extend the company's reach to end users such as manufacturers of beverages, soups, cereals, and crackers.

Bunge Raises Its Outlook

News of the deal, which is expected to close in the last three months of this year, sent shares of Corn Products soaring 18.3%, to finish the session at 50.75, while Bunge's stock closed 9.4% lower, at 110.70.

Separately, Bunge raised its earnings outlook for 2008, to $9.35 to $9.65, from a prior range of $7.10 to $7.40 a share, citing better-than-expected results in its agribusiness—especially oilseeds—and fertilizer segments, with higher prices driving bigger margins. Wall Street analysts had estimated full-year earnings of $7.70 a share.

It appears that the Corn Products acquisition could be a sign of more consolidation to come, particularly by well-managed companies that know the global business, says Joe Victor, vice-president for marketing at Allendale, a brokerage and commodity research advisory firm in McHenry, Ill.

Having been a dominant force in the global oilseed market, "now is the time for [Bunge] to get more involved with corn starch and sweeteners," given its confidence in a growing population and consumption worldwide, Victor says. "It sure does appear that those who have the strong capital financing behind them do have the power to [buy] some of the weaker companies out there," adds Victor.

For all the opportunities in corn products such as sweeteners and starches, Victor says that higher corn prices are putting a strain on companies that buy corn not only for food and animal feed, but for biofuels such as ethanol.

Indeed, market observers have noted that the possibility of financial strains among smaller ethanol producers may point to even clearer consolidation prospects for Archer Daniels Midland (ADM), which already has a foothold in the ethanol market, says Victor.

Moving from Oilseeds to Corn

Just as it did several years ago during a time of distress in the grain elevator sector, ADM would be able to choose which ethanol producers it wants and buy them for 30¢ on the dollar or less, he adds.

While the diversification in crops and product lines is appealing, and Bunge will be able to increase the products it runs through its existing distribution system, analyst Christine McGlone at Deutsche Bank Securities (DB) warned in a June 23 note that the acquisition will shift the focus of Bunge's agribusiness from oilseeds to corn, which is more difficult in the current environment, where corn is so vulnerable to supply disruptions. (Deutsche Bank does and seeks to do business with companies covered in its research reports.)