CHICAGO / CALGARY, Alberta (Reuters) – The leading US grain trader Archer Daniels Midland Co ( ADM.N ) has proposed an acquisition of Bunge Ltd ( BG.N ), the Wall Street Journal reported on Friday, a move that could set up a battle for Bunge with London rival Glencore Plc ( GLEN.L ).
The big grain merchants who make money buying, selling, storing, sending and selling crops have had problems in recent years with the global oversupply. The narrow margins have reduced core commodity trading operations, including those of Bunge, ADM, Cargill Inc [CARG.UL] and Louis Dreyfus Co [AKIRAU.UL]. Together, the four are known as the "ABCD".
Consolidation is considered a remedy. Last year, Glencore sought an alliance with grain operator Bunge in what was seen as the beginning of a wave of consolidation in the industry.
The Journal cited unidentified sources that said that ADM had approached and that the details were unclear.
Bunge, based in White Plains, New York, operates in more than 40 countries and is the largest exporter of agricultural products in Brazil, while ADM, based in Chicago, says it has customers in 160 countries.
Bunge, which has a market capitalization of $ 9.79 billion, closed at 11 percent at $ 77.56 on Friday. ADM has a market capitalization of $ 22.64 billion.
ADM said it does not comment on "rumors or speculation," while Bunge was not immediately available for comment.
DISPLACEMENT OF THE STRATEGY?
Grain companies have expanded into higher-margin ventures, such as food ingredients and aquaculture, to compensate for the weak results and abrupt changes in their traditional crop management businesses.
In 2014, ADM purchased natural ingredients company Wild Flavors for approximately $ 3 billion in its largest deal to date. The company has also expanded to the management of healthy ingredients such as fruits, nuts and old grains.
"The news of the ADM offer is a bit surprising given that ADM had been indicating that the strategic direction of the company was more towards value-added traditional products," said Farha Aslam, analyst at Stephens Inc.
] HURDLES LOOM
Any alliance would likely face rigorous scrutiny from regulators and opposition from farmers who fear delivering more market control to ADM could hurt the prices paid. wheat, corn and soybeans.
The greatest overlap between ADM and Bunge in the United States is at the origin of the grain and the processing of oilseeds, Aslam said. The companies probably need to divest facilities in North America and possibly also in Europe, he said.
Aslam also said that it was possible that ADM and Glencore could partner in a bid for Bunge to split their operations.
"ADM would take downstream companies with higher added value and Glencore would own the companies plus agricultural commodities," he said.
Analysts at Morningstar said Bunge could go for around $ 90 to more than $ 100 per share. Aslam estimated that the fair value for Bunge in an acquisition would be $ 90 to $ 95 per share.
A source of grain marketing said there is so much overlap of oilseed crushing assets between the two companies that the deal seems defensive, a way to prevent Glencore from acquiring Bunge. Still, it would strengthen ADM's assets in South America, the trader said.
Bunge rejected Glencore last year, and the two reached an agreement that temporarily prevents Glencore from making a hostile offer, according to news reports.
An ADM-Bunge merger would also face opposition from groups of farmers in key agricultural markets, including the United States, the European Union, China, India and Brazil, said Erik Gordon, a professor at the Ross Business School at the University of Michigan.
The relative delay of the companies to join the merger game of the large agriculture – following in the footsteps of DowDuPont ( DWDP.N ), Nutrien Ltd ( NTR.TO ) and others – It would make obtaining regulatory approval even more difficult, Gordon said.
"When you are the first, there is still more competition, and once you have let some pass, you may have doubts," Gordon said.
Illinois farmer Dan Henebry, who delivers corn and soybeans to ADM headquarters in Decatur, Illinois, said he was concerned that a Bunge acquisition could lead to grain handlers paying less to farmers for your crops.
"We've had so many mergers," Henebry said. "Less competition is not good."
Rodney Weinzierl, executive director of the Illinois Corn Growers Association, said they would see the deal up close, although Illinois farmers have a fairly diverse group of buyers for their corn, ranging from ADM and Bunge to ranchers .
"Obviously, when a couple of our clients talk about being a customer, they lose the competition," he said.
Report of John Benny in Bengaluru, Rod Nickel in Calgary, Alberta; Tom Polansek in Chicago, Chris Prentice in New York and Diane Bartz in Washington; Written by Peter Henderson and Anna Driver; Edition of Maju Samuel and Matthew Lewis