Glencore likely to buy Bunge, claims United First Partners

Monday, 24 July 2017, 2:11 pm

If your following Glencore's paintakingly-slow-moving bear hug for grain merchant Bunge then this note (see below) from United First Partners might be of interest.

The broker reckons there is over a 50pc chance of the FTSE 100 giant buying Bunge...

BUNGE ▷▷▷ WE DIG IT – BUILD INITIAL POSITIONS


Trading Strategy: Build Initial Positions

In our view, the potential business combination between Glencore’s Agribusiness and Bunge has a compelling strategic rationale. We would expect an offer price to be in the range of $91 - $98/share, implying ~15% - 25% upside potential from current trading levels. Taking into consideration the indicated preliminary interest by Glencore, expected industry consolidation (as per Bunge’s management) and attractive EPS accretion profile, in our view the probability of this transaction is higher than 50% and we would therefore recommend investors to build initial positions. Irrespective of Bunge’s immediate dismissal of the involvement in any kind of business discussions with Glencore, we believe that Bunge management would be willing to engage in negotiations if an offer were to come at $95/share or above.

STRATEGIC RATIONALE

Glencore has been actively looking to grow its agriculture business in North and South America, the regions where Bunge’s operations are particularly strong. Bunge would be a perfect partner for the announced strategic initiatives for Glencore’s agriculture business division. We expect synergy potential (predominately from price arbitrage opportunities) to be in the range of $300m on an annual, run-rate basis.

ANTITRUST MANAGEABLE, THOUGH DIVESTITURES ARE LIKELY

We expect a potential combination between Glencore and Bunge to gain antitrust clearances across all the jurisdictions, although in-depth/Phase 2 investigations and divestitures are likely. The big four ABCD players in the food commodities trading segment control c.90% of the market, with the remainder of the traders, including Glencore, having limited market shares. Precedents indicate that the product markets are likely to be defined narrowly, and the geographic markets should be broad, which should limit the problematic overlaps.

BUNGE ANTI-TAKEOVER DEFENCES

The antitakeover defences are relatively weak, given that (i) the board is not staggered, (ii) a 10% shareholder can call a special meeting, (iii) there is no poison pill in place, although one can be issued at any time.

DOWNSIDE ANALYSIS

Our fundamentally derived value of Bunge is $76.8/share, implying 2.1% discount to the current trading levels. Our downside price is based on the undisturbed date of 22 May 2017, adjusted for index performance throughout the period,yielding a price of $72.0/share. At these levels, little takeover premium is priced into the stock and BG’s price implies just a ~30% chance of a deal at $95 or higher. Bunge is currently trading at $78.4/share, implying EV / EBITDA 2017E of 9.8x, well below its peer average of 10.9x. Based on ADM’s (key peer) multiple of 10.6x, and applying a 15% discount due to Bunge’s lower EBITDA margins and slightly higher leverage, Bunge share price should be in the range of $74/share. We conclude that there are limited downside risks.

Therefore, we would recommend investors to build initial positions in the expectation of a takeover offer by Glencore and potential returns in the range of ~20%. ..

[Disclaimer - the information on Betaville does not consitute any form of investment recommendation and is not intended to be relied upon by readers in making, or refraining from, any investment decisions].

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