The move from US agribusiness giant Bunge to buy smaller peer Corn Products International may have got a cool response from the market yesterday (23 June) but the deal will benefit both companies – and give their customers, the global packaged food giants, plenty of food for thought. Dean Best and Katy Humphries report.
One of your biggest suppliers has just got bigger.
The move by US agricultural giant Bunge to buy fellow agribusiness Corn Products International has created a commodity group that generated a combined US$48.2bn in revenue last year – and almost $1bn in net income.
Initially, the market was decidedly cool about Bunge’s move for its smaller peer. Shares in Bunge dropped over 9% when the deal was announced yesterday (23 June) and have dipped again today by just under 1%.
However, analysts have praised the move, pointing to a series of benefits for Bunge, including Corn Products’ presence in emerging markets and portfolio of more value-added products.
In a client note to investors, BMO analyst Ken Zaslow pointed to Corn Products’ strong market share in Latin America, including in Brazil, Argentina and Chile. Zaslow also noted that Corn Products’ “value-added and specialty ingredients products (like liquid glucose, crystalline dextrose, polyols and other fermentation products) are highly complementary and margin-accretive to Bunge’s existing products, which are mostly commoditized and low margin”.
The deal, worth some $4.8bn, will give Bunge the ability to produce finished corn products, like starches and sweeteners, including high fructose corn syrup. And it will mean food manufacturers will face a bigger, more powerful ingredients supplier as commodity costs continue to rise.
While both companies have benefited from the agricultural boom and increasing commodity costs, the merger will strengthen Bunge’s balance sheet.
Bunge posted a negative operating cash flow of $411m on revenues of $43bn last year, while Corn Products reported a positive cash flow of $258m.
Corn Products has predicted $4bn in revenue this year and has posted first-quarter net income of $64m – up 29% year-on-year.
Rising commodity costs have proved the key factor in Bunge’s acquisition of Corn Products. Bunge has moved to build its business in what is a volatile sector. Commodity costs may be high – which proves lucrative for companies like Bunge – but the market remains unpredictable and the acquisition of Corn Products will help Bunge diversify its business and spread the risk of operating in a volatile part of the food supply chain.
For Bunge chairman and CEO Alberto Weisser, diversification was a key factor in his company’s move for Corn Products. “Combining with Corn Products provides a unique opportunity for Bunge to establish an integrated, global presence in the corn value chain, which is highly complementary to our existing operations,” Weisser said.
“Corn Products is the leading pure-play franchise in corn refining and will add higher-margin starch and sweetener products to Bunge’s product portfolio, expand our operations in important growth markets, and diversify our revenue stream with a solid cash-flow business.”
Growing global sales of starches and sweeteners, as demand for products like soft drinks and confectionery soars in the emerging markets of the East, would have also proved an attraction for Bunge, which, as a business, has focused on North America.
Bunge has indicated that it anticipates the global market for corn-based sweeteners and starches to grow by around 5% annually. This growth will largely be propelled by rising demand in emerging markets such as Mexico, Pakistan, India and China.
The merger gives Bunge operations in 40 countries, which could appeal to food firms with an international presence such as Kellogg and Nestlé.
Although Corn Products is operating in a lucrative and growing sector, as an independent company lacking Bunge’s distribution and logistics infrastructure, Corn Products could well have struggled to compete.
“Our stockholders will have an ongoing equity interest in a combined company that is well-positioned to serve customers around the world with a broad product portfolio, integrated distribution network and innovative products,” Sam Scott, president chairman and CEO of Corn Products said.
The companies expect to close the deal by the end of the year. They estimate annual cost savings of between $110m and $120m.
As Bunge grows, so food manufacturers will face a larger supplier. Bunge will remain the third-largest business of its kind in the US – behind Cargill and Archer Daniels Midland – but the absorption of Corn Products will only boost Bunge’s power.
Nevertheless, that power need not necessarily present a threat to food manufacturers already feeling the pinch from rising commodity costs. A more diversified Bunge will make the company a one-stop shop for a range of commodities from oilseeds to corn.