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M&A Chatter in Agriculture Is Shushed by Uncertainty Over Trade War

M&A Chatter in Agriculture Is Shushed by Uncertainty Over Trade War

(Bloomberg) -- The agriculture deals buzz has gone quiet.

For a while, it looked as if the big trading houses that dominate agriculture were about to see their biggest shakeup in 20 years. Bunge Ltd. was targeted by rivals Glencore Plc and Archer-Daniels-Midland Co., while Louis Dreyfus Co. also explored potential deals. Meanwhile, mid-sized traders prepared to buy up any spoils that might roll out from any big merger.

Fast forward to today and the chatter of 2017 and 2018, involving deals worth as much as $15 billion each, has all but faded. Uncertainty surrounding the U.S.-China trade war and the U.S. presidential election have put big deals on hold, according to a dozen interviews with industry executives, bankers and consultants from Geneva to New York and Chicago.

The trade war, in particular, "makes it hard for anyone to make a decision," said Chris Shaw, an analyst at boutique research and broker firm Monness Crespi Hardt & Co. in New York.

M&A Chatter in Agriculture Is Shushed by Uncertainty Over Trade War

Meanwhile, the industry appears headed into a period of what bankers like to call “self-help." They’re selling loss-making units, eyeing smaller bolt-on deals and, above all, cleaning up their finances to hunker down during a tough market for wheat, corn and soybeans.

"First, we need to shrink," said Greg Heckman, the newly installed chief executive officer of Bunge, at the BMO Farm to Market conference in New York last week. "We put a lot of money to work and now it’s time to improve the operating performance, improve the returns and position ourselves for when we have the right to grow again."

‘Piecemeal Basis’

Heckman doubled-down on his message the following day in a close-door meeting with Wall Street analysts, according to Thomas Simonitsch at JPMorgan Chase & Co. "We now suspect potential strategic actions are likely to be executed on a piecemeal basis," Simonitsch said.

Juan Luciano, the head of ADM, also spoke at the BMO conference, saying he is in the market for bolt-on acquisitions -- "the less than $100 million kind of thing,” he said, noting there’s no M&A above $100m to $200m in the company’s five-year plan. "Bigger than that," he said, "I think it’s difficult to find something."

Speaking in private, commodity executives say it’s difficult to value a business right now because it remains unclear how the world of farming will look until Washington and Beijing reach a trade deal.

Soybean Flow

Take soybeans: In a regular market, the U.S. would ship soybeans into China for crushing into soymeal used to fatten livestock. Today, American soybeans are traveling into Argentina for crushing before being exported, often to Europe. In turn, that frees Argentinian soybeans to go directly into China. The flow change means that the collection of silos, ports, and crushing plants owned by the trading houses are difficult to value.

If any deal were to happen today, valuations would have to reflect not only the uncertainty around the trade war, but also the fact that profits across the industry have been sharply down compared with five years ago. In recent years, a series of bumper crops eroded the volatility that the trading houses rely on to generate profits.

While price swings are back, the unpredictable nature of U.S. President Donald Trump’s policies -- and his tweets -- are adding to the uncertainty surrounding the industry.

Still, industry executives believe that consolidation remains likely over the long run, with the issue being more a case of when than if.

South American Footprint

Even if the trading houses pause for a year or so in seeking big deals, the trade war could make a company like Bunge, with a large South American footprint, attractive, according to Shaw, the Monness Crespi Hardt analyst.

The dealmaking drive over the past few years reflects, in part, the arrival of two large players with a desire to grow.

Glencore has further ambitions in agriculture after buying Canadian grain handler Viterra Inc. for C$6.1 billion ($4.8 billion) in 2012. Meanwhile, Cofco Corp., the largest Chinese food company, has created a large international trading subsidiary over the last five years with a $4 billion buying spree that saw it take control of Nidera BV and the agricultural arm of Noble Group Ltd.

Beyond the growth appetite from Glencore and Cofco, executives see the industry over-invested as a whole during the golden years between 2004 to 2011, when profits boomed. Since then, trading margins have plunged, in part due to too much capacity in ports, silos and milling and crushing plants. At the same time, information is traveling faster than ever, closing the regional price gaps, or so-called arbitrages, traders benefit from.

M&A Chatter in Agriculture Is Shushed by Uncertainty Over Trade War

To be sure, The Anderson Inc., a medium-size U.S. grain trader, earlier this year closed the acquisition of the Lansing Trade Group LLC, a smaller rival. The acquisition’s $300 million size, though, wasn’t the kind of big deal the industry was anticipating.

The trade war, meanwhile, has complicated the outlook for everyone.

While Cargill Inc. has navigated the crisis better than most, others have seen their profits decline. Dreyfus, for example, saw its net income drop from a peak of $1 billion in 2010 to about $300 million over each of the last four years. The company, controlled by Russian billionaire Margarita Louis-Dreyfus, has been sounding out potential investors in Asia to buy a small stake in the trading house.

"The markets are having a hard time with that kind of uncertainty," said Andy Kenny, chief financial officer at grains trader The Scoular Co. "While we love volatility and something in the market, this isn’t bringing that because nobody knows how to quite react from the end user to the farmer."

--With assistance from James Attwood and Laura Millan Lombrana.

To contact the reporters on this story: Mario Parker in Chicago at mparker22@bloomberg.net;Javier Blas in London at jblas3@bloomberg.net;Isis Almeida in Chicago at ialmeida3@bloomberg.net

To contact the editors responsible for this story: Will Kennedy at wkennedy3@bloomberg.net, ;James Attwood at jattwood3@bloomberg.net, Reg Gale, Steven Frank

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