A New Crop of Ag-Stock Deals?

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The advantage oilseeds have over corn is the wide range of global suppliers, including German and Canadian rapeseed and cottonseed from Malaysia and Indonesia, says Victor. By contrast, corn exports come from only three countries—the U.S., Brazil, and Argentina—which makes it harder to fill the gap created by an event like the recent Midwest floods.

But Bunge has done a good job of managing its corn business, and the contracted fixed price part of the total portfolio for the combined company should represent less than 5% of sales, McGlone said in her note.

Bunge said it expects the acquisition to lower costs and boost its profits by an estimated $100 million to $120 million per year, with savings to come from areas such as procurement, logistics, and eliminating duplicate costs. David Driscoll, an analyst at Citi Investment Research (C), said there's not much likelihood that other companies will bid for Corn Products, though "wild cards would be Tate & Lyle (TATE.L) and one of the Asian agricultural processors such as Wilmar."

But Driscoll said he doubts the deal will produce any cost savings in the first year and sees the additional shares going to Corn Products shareholders lowering Bunge's 2009 earnings by 15¢ to 16¢ a share, assuming a conversion ratio of 0.4628 shares of Bunge for one share of Corn Products and a profit of $260 million coming from Corn Products' operations next year. He has a hold rating on Bunge and a buy rating on Corn Products. (Citigroup Global Markets has done noninvestment banking business with Bunge and Corn Products within the past year.)

Stronger Balance Sheet a Benefit

Bunge could issue a smaller number of shares if its stock rises as high as 133.10, the maximum price that would still entitle it to the lowest conversion ratio of 0.4207 Bunge shares for each share of Corn Products, Driscoll said.

Another major plus for Bunge will be a stronger balance sheet, given Corn Products' track record as a stable cash-flow generator, with $258 million in operating cash flow in 2007, Credit Suisse (CS) analyst Robert Moskow wrote in a research note on June 23. Bunge had negative cash flow of $411 million last year, while its debt of nearly $5 million is much larger than the $414 million in debt held by Corn Products, he said. (Credit Suisse does and seeks to do business with the companies covered in its reports and is advising Bunge on the acquisition.)

Standard & Poor's Equity Research downgraded Corn Products' stock to hold from buy on June 23, ahead of the announcement of deal, and reaffirmed the new rating after the news, citing valuation with the shares trading close to the acquisition agreement price. (S&P, like BusinessWeek, is a unit of The McGraw-Hill Companies (MHP).)

Bogoslaw is a reporter for BusinessWeek's Investing channel.