Exclusive: Cargill on verge of buying ADM cocoa unit - sources

ABIDJAN/NEW YORK Wed Oct 2, 2013 2:23pm EDT

A logo is pictured on the building of Cargill International SA in Geneva August 4, 2009. REUTERS/Denis Balibouse

A logo is pictured on the building of Cargill International SA in Geneva August 4, 2009.

Credit: Reuters/Denis Balibouse

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ABIDJAN/NEW YORK (Reuters) - Cargill Inc CARG.UL, one of the world's leading cocoa traders, is in the final stages of a deal to buy Archer Daniels Midland Co's (ADM.N) cocoa business, sources familiar with the discussions said, creating a price-setting global giant.

Combining two of the world's top cocoa merchants and bean grinders would create a company big enough to compete with Zurich-based Barry Callebaut (BARN.S), the world's largest maker of industrial chocolate products.

Cargill and ADM are hammering out the final details of the deal, said the sources, paving the way to the second major takeover this year in an industry that is set to be dominated by two firms. The timing of an official announcement is not known but could be made within days, the sources said.

"As the cocoa market will now be dominated by both Barry Callebaut and Cargill, the small players need to be competitive or they might risk being squeezed out of the market," said Vanessa Tan, an investment analyst at Phillip Futures in Singapore.

Financial details of the deal were not clear, although some sources had said this summer the ADM unit may be worth as much as $2 billion.

Cargill was long believed to be one of only a handful of companies with the expertise and focus on the niche cocoa business to buy ADM's business, which spans Africa, Asia and the United States. The U.S.-based agribusiness firm had begun conducting due diligence earlier this year.

In July, Barry Callebaut sealed its $860 million acquisition of the cocoa ingredients division of Petra Foods (PEFO.SI).

"It's too much consolidation. It's not good for the market in general," said one veteran industry source.

"When you have that much of a concentration in the market, it's tough for independent trading companies to make the money they should make. They have one buyer less so they'll have to beg Barry Callebaut and Cargill to buy their beans."

ADM started looking for potential suitors for the business late last year, sources have told Reuters, and the company announced it was in discussions about a possible sale in June.

An official at ADM declined to comment and Cargill would not comment beyond a short statement that said the privately held company continues to assess initiatives.

"We will communicate as and when there is anything definitive," a Cargill official said in an email on Tuesday.

Cargill beat out smaller rivals who were interested in picking up individual assets, but resisted buying the whole business, three sources familiar with the matter said.

Grinders turn cocoa beans into butter and powder, the main ingredients for chocolates. Cocoa butter, which gives chocolate its melt-in-the-mouth texture, is trading at its highest premium since 2008 in Asia, and is at eight-year highs in the United States due to tight supply and rising demand. <COC/AS>

"Cargill and Barry Callebaut combined will account for more than 50 percent of global capacity. In the future, grinders like Blommer in the U.S. and smaller grinders in Asia will find it tougher and tougher to compete with the giants," said a Singapore-based dealer who has a grinding facility in Indonesia. "You might see consolidation among the smaller ones."

Some analysts and bankers have cautioned that competition concerns would arise, particularly in Ivory Coast and Ghana, the world's top two growers, where both companies own processing plants.

A 2008 United Nations report on the global cocoa industry showed just 10 companies account for two-thirds of global grinding.

GRAINS VS COCOA

For ADM, the departure from cocoa would cement a shift towards the grains sector as it finalizes its $3 billion takeover of GrainCorp (GNC.AX), the largest bulk grain handler on Australia's east coast.

ADM also wants to cut its exposure to reduced profit margins that are the result of increasing cocoa processing capacity, traders said.

Cargill instead has invested heavily in the sector. It runs cocoa plants in West Africa, the No. 1 growing region, and in Brazil, Indonesia and major consuming countries in Europe. It is betting on rising long-term demand as consumers in emerging markets develop a taste for chocolate.

It bought German cocoa grinder Kakao Verarbeitung Berlin in 2011 and in May began building a $100 million cocoa processing facility in Indonesia.

ADM has cocoa processing facilities in the United States, Ivory Coast, Ghana, Singapore and Brazil.

Barry Callebaut said it now buys around 1 million tons of cocoa beans annually, or roughly 25 percent of the global production at nearly 4 million tons. Some traders' estimate Cargill buys roughly 600,000-800,000 tons and ADM Cocoa around 500,000-600,000 tons.

The global production of about 4 million tons in the 2012/13 crop year is more than double the average in the 1980s of about 1.84 million tons, International Cocoa Organization (ICCO) data showed.

Bean processing has followed in line, with 2012/13 grindings at 3.99 million tons, up from the average of 1.95 million tons in the 1980s, ICCO data showed.

(Writing by Josephine Mason in New York; Additional reporting by Lewa Pardomuan in Singapore and Marcy Nicholson in New York; Editing by Ryan Woo, Kenneth Maxwell and Bob Burgdorfer)

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