UPDATE 3-Cargill buying ADM's chocolate unit in North American expansion

(Adding link to FACTBOX)

NEW YORK/CHICAGO, Sept 2 (Reuters) - Commodity merchant Cargill Inc said on Tuesday it will buy the global chocolate business of its rival Archer Daniels Midland Co for $440 million in a move to expand its production capacity in North America.

The deal, which includes three North American chocolate plants and three in Europe, is the biggest yet in Cargill’s effort over the past year to increase its chocolate making footprint in a bet on long-term growth in demand.

The deal is a “major milestone in Cargill’s chocolate growth strategy,” said Bryan Wurscher, president of Cargill Cocoa and Chocolate North America, in a statement.

For ADM, it marks a refocus on its larger cocoa bean processing operations, one of the industry’s largest that competes with Barry Callebaut, Cargill and other big cocoa traders Olam International Ltd and Ecom Agroindustrial Corp.

It also comes just over four months after the company ditched plans to sell its cocoa and chocolate business after long-running negotiations collapsed and said it would instead divest the underperforming chocolate operations.

Cargill had been in final-stage talks to buy the combined operation, sources told Reuters last year.

The sale will also allow ADM to “redeploy capital for higher-return investments,” ADM Chief Executive Patricia Woertz said.

The agri-merchant has recently made a push into the food ingredient market, scooping up Swiss-German natural ingredient company Wild Flavors for about $3 billion.

ADM’s stock rose 1 percent to $50.37.


The deal highlights diverging strategies by two of the world’s largest players in the niche cocoa market where merchants struggle with higher costs and tighter margins due to increased cocoa bean processing capacity.

The move downstream into value-added chocolate products may protect Cargill from intense competition among cocoa processing, which make butter and powder used in chocolate, traders said. The company is one of the industry’s largest bean processors.

Late last year, it announced plans double capacity at its biggest European chocolate facility in Belgium.

The acquisition is also a bet on long-term growth in demand in Asia, where consumers’ appetites for candy and cookies is burgeoning, and in North America, the world’s second-largest consumer of chocolate, where consumption has outpaced Europe and Asia.

Adding ADM’s facilities will double the number of facilities Cargill operates in North America and significantly increase its European footprint where it operates seven plants.

“They see demand is good in chocolate and see it as a way of getting a good deal on an existing business,” Nick Gentile, managing partner of commodity trading adviser NickJen Capital in New York.

Even so, it comes as the cost of cocoa beans, a key ingredient in chocolate, has jumped more than a third in the past year, hitting three-year highs last week on concerns about dwindling supplies. U.S. dairy prices have also soared.

Traders agreed Tuesday’s deal will have less impact on the tight-knit market than a tie-up of ADM and Cargill’s cocoa operations. Experts said a deal of that size would have raised regulatory concerns, particularly in Europe.

About 700 employees are set to transfer to Cargill from ADM as part of the transaction, which is expected to close in the first half of next year, according to the companies.

ADM will end cocoa processing operations at a plant in Hazleton, Pennsylvania, resulting in the elimination of about 90 jobs, the company said. (Reporting by Josephine Mason in New York and Tom Polansek in Chicago; Editing by Franklin Paul, Tom Brown and Andrew Hay)