Glencore’s agribusiness disposal is not just about debt
Why is miner and commodity trader Glencore trying to sell a large stake in its agricultural business? The obvious answer is to pay down debts, which at the end of last year stood at nearly $26bn. But there are other factors at play.
Through its $4.8bn acquisition of Canadian grain handler Viterra in 2012, Glencore has emerged as a major player in agriculture, handling 44m tonnes of grain last year. But to be considered a truly global player it needs to bulk up in South America and the US — two of the world’s most important food markets.
This is where a partner comes in. Joining forces with a strategic investor, most likely a group of sovereign wealth funds, would give Glencore the firepower to make acquisitions in the Americas. Glencore is targeting a sale of between 30-49 per cent, which JPMorgan says could raise up to $3.9bn.
“To grow in that business, you’re going to need more financial muscle,” Glencore’s chief executive Ivan Glasenberg told analysts after the company reported annual results earlier this week
“It’s clear it’s time to bring in a partner, like we did when I first expanded the coal business in Colombia,” he said, referring to the deal he struck with rival mining companies to jointly acquire Cerrejón, a major field in the South American country.
So what could Glencore look to purchase?
The industry’s four biggest players — Archer Daniels Midland, Bunge, Cargill and Louis Dreyfus Commodities — are probably beyond its reach for a number of reasons. Some are too big, others are wedded to remaining private. That leaves mid tier companies.
Previous reports have linked Glencore with a bid for The Andersons, an $800m Nasdaq-listed company based in Ohio. Scoular Co and Lansing Trade Group, both privately-held companies, have also been mentioned as possible targets.
But the strong US dollar has made exports from the US increasingly uncompetitive. Relatively high prices over the past decade have also led to increased production, leaving the US market oversupplied.
So for now, Glencore might look to South America and Brazil, the world’s biggest exporter of soyabeans. Indeed, Glencore’s most recent deal in agriculture was the purchase of a 50 per cent stake in an export terminal in Brazil from ADM.
“It’s quite clear that there is going to be a period of some industry consolidation coming up there and you don’t want to miss out on that,” said Glencore’s chief financial officer Steven Kalmin after the results.
But before Glencore can buy anything it needs to complete the sale of a significant minority stake for an acceptable price. Some analysts say that this could be a challenge because it is a buyer’s market at the moment. After a bumper year in 2014, adjusted earnings from Glencore’s agriculture division fell 48 per cent to $542m last year.
But Mr Glasenberg does not appear to be worried.
“We have strong interest in the ag business,” he told analysts on Tuesday. “We’re dealing with various companies and I feel very confident we will have that sale concluded definitely before the first half of this year.