SINGAPORE/HONG KONG COFCO Corp. has agreed to pay $1.5 billion for a majority stake in Noble Group Ltd's agribusiness, its second acquisition in less than two months, as China's largest grain trader seeks to strengthen its market position worldwide.
The two companies plan to form a joint venture, in which COFCO will own 51 percent, to link its grain processing and distribution business in China with Noble Agri's grain sourcing and trading arms, the firms said on Wednesday.
The move will help China develop a powerful agricultural trading house along the lines of its Unipec oil trading business - one of the world's biggest buyers of crude oil - as it seeks to shore up supplies of animal feed grains to meet soaring demand for high-protein food.
"We can source ample, and low-cost, grains by direct purchases from farmers in major grain-growing countries," said Cheng Guoqiang, a researcher with the State Council Development and Research Center, the think-tank of China's cabinet.
COFCO's participation in the global grain trade will also help China better track the world grain market, Cheng added.
The deal adds volume to Noble's trading business via COFCO and allows it to reduce debt. Noble's stock - which jumped as much as 5 percent on Wednesday - has risen nearly 25 percent since March 4, when Reuters broke the news that COFCO was in acquisition talks with it, adding about S$2 billion in market value.
China is seeing massive expansion in demand for grains such as soybeans and corn, as the growing ranks of its middle class demand more meat in their diet.
COFCO bought a 51-percent stake in Dutch trader Nidera late in February to gain direct access to South American grain and oilseed supplies in a deal that valued Nidera at $4 billion including debt.
The Noble and Nidera deals mark the biggest overseas acquisitions in China's grain sector, with a combined $2.8 billion investment, COFCO said in a statement.
The company will own high-quality assets in the world's top grain and vegetable oil producing regions, including Brazil, Argentina, Indonesia and the Black Sea area, following these deals, COFCO said.
The deals follow a wave of consolidation in the world agribusiness sector that has shrunk the number of potential acquisitions for it to bulk up enough to compete globally with larger rivals ADM (ADM.N), Bunge Ltd (BG.N), Cargill Inc CARG.UL and Louis Dreyfus Corp LOURD.UL, known as the ABCDs.
SOURCES OF SUPPLY
The Noble acquisition allows COFCO to bring food supply into China without having to go through the ABCD pipeline, and will allow it to control costs better.
"By pushing the international strategy, COFCO will set up a stable grain corridor between the largest global grain-growing origins and the biggest global emerging market, in terms of grain consumption growth in Asia," COFCO Chairman Frank Ning said in a statement.
Noble's grains and oilseeds operations focus on South America, Europe and Asia. It operates three oilseed processing factories in Asia, and supplies grains, oilseeds, vegetable oil and by-products throughout the region from Singapore.
Noble, which is 14 percent owned by sovereign wealth fund China Investment Corp. CIC.UL, also trades sugar, coffee and raw materials, such as iron ore. Its agricultural division is the smallest, and generated revenue of $15.5 billion last fiscal year, accounting for about 16 percent of the firm's total.
Under the terms of the deal, COFCO's $1.5 billion offer serves as an initial cash payment upon closing, expected in the third or fourth quarter. The final price will depend on a multiple based on Noble Agri's year-end book value and its debt will be rolled into the joint venture.
A consortium led by China-focused private equity firm Hopu will join COFCO as a minority investor in the acquisition and will hold a third of the investment vehicle making the purchase. Hopu is a private equity fund backed by Singapore state investor Temasek and run by the well known Chinese banker Fang Fenglei, with whom Goldman Sachs partnered for its China joint venture.
The final price COFCO pays will be 1.15 times the audited book value of the agribusiness division - factoring in COFCO's 51 percent ownership - for the financial year ending December 31, 2014, according to the Noble statement. The audited book value was $2.8 billion by December 31, 2013, it said.
COFCO and Noble still need to obtain regulatory and shareholder approval for the deal.
J.P. Morgan was sole financial adviser to Noble while Morgan Stanley advised the consortium that includes COFCO and Hopu. (This story has been refiled to fix formatting; adds COFCO statement)