Glencore food binge could leave investors hungry

Wheat grains are seen in a sorting machine at a silo in Fundulea, 35 km (22 miles) east of Bucharest July 15, 2013. REUTERS/Bogdan Cristel

LONDON (Reuters Breakingviews) - Glencore has fought hard for a lean balance sheet. Now it has one, it can keep things simple and give more money to shareholders, or binge on an acquisition. A merger approach to U.S. agricultural trader Bunge suggests Chief Executive Ivan Glasenberg favours the latter, somewhat riskier course of action. Such boldness could leave investors going hungry.

Bunge was lukewarm about the Swiss trading and mining group’s desire for a “consensual business combination” on Tuesday. Nonetheless, the U.S. company’s shares closed up almost 17 percent, giving the company a market capitalisation of $11.5 billion. Add in $3.8 billion of net debt, and it means a cash bid would cost at least $15.3 billion. It could cost even more: Glasenberg has previously shown a reluctance to back down too readily.

Bunge ticks a strategic box. Its agribusiness, which includes grains, oil seeds and sugar, would give Glencore more exposure to a low-margin but low-risk sector that is strongly pegged to global population growth. But more covetable are its physical silos and mills. Those become more valuable in periods when crop supplies are in abundance, as they are now.

The financial thinking is a bit fuzzy. On one hand, Glencore’s agricultural business, which would do the deal, is a joint venture held alongside two Canadian pension funds – so its debts don’t figure on the parent’s balance sheet. On the other, it’s unlikely Glencore Agriculture could buy something so big without help. Glencore would have to stump up cash, or see its 50 percent stake diluted.

And it’s not clear that would be worth it. Bunge is estimated to make $1.4 billion of operating profit in 2018. Tax that at its 26 percent rate, and the return on investment would be just 7 percent. Glencore could juice that up with cost savings: were it to cut half of Bunge’s selling and admin costs of around $1.4 billion, that return would rise to 10 percent. That said, cutting costs – insofar as it means axing jobs – isn’t exactly a popular trade in the United States right now.

So Glencore may be better off holding onto its money – and maybe even refraining from big shareholder payouts. Commodities prices have stalled and doubts over China’s economic growth still linger. Glasenberg might be wise to keep his resources safe in their silo.


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