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Bunge to buy 70% stake in palm oil producer
September 14, 2017
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CHICAGO: Grains trader Bunge said it would buy a 70 per cent stake in a Malaysian palm oil producer for $946 million, to expand its higher-margin food ingredients business - a move that industry experts said would also make it a tougher takeover target.

Bunge’s shares fell 5.9 per cent to $71.30 after it announced the deal, for IOI Loders Croklaan, along with a credit facility of $900 million to help pay for it.

The deal comes just two months after Bunge announced sweeping cost cuts aimed at reversing a major slide in profit and after successfully rebuffing a takeover approach from rival Glencore earlier in the year.

“The market is perceiving that this takes them out of the M&A risk,” said Bill Densmore, senior director of corporate ratings at Fitch Ratings, noting that the share price had been elevated this summer by expectations of a takeover.

The deal’s relatively high valuation cost of more than 12 times IOI Loders’ estimated 2018 EBITDA and the increased debt from the transaction will make the Bunge a more expensive takeover target, said Farha Aslam, analyst with Stephens Inc.

Bunge and other global grains traders, including Archer Daniels Midland (ADM) and Cargill, have been trying to find ways to diversify and shore up earnings in the face of a global grains glut that has kept corn and soybean prices languishing for about four years.

Bunge said in August, as it reported a 34 per cent drop in quarterly earnings, that it thought Asian and South American oilseed crushing were areas for consolidation, along with US grain handling.

Chief Executive Soren Schroder said on Tuesday that the company would be “somewhat constrained” in M&A after this deal but that partnerships and joint ventures were still possible.

The deal, once fully implemented, will get Bunge’s food and ingredients business close to its long term target of contributing about a third of the company’s earnings, he said.

“It really gets us established in China as a specialty player in oils rather than just a refined oils player, which is what we are today,” he said.

“It is the biggest growth market pretty much across the entire spectrum from food service to confection to direct human consumption, infant nutrition in particular,” he said.

The transaction is also expected to lead to $15 million in cost cuts in the first year, according to Bunge.

IOI Loders has a portfolio that includes palm and tropical oil-derived products. Palm oil is the most widely used edible oil in the world, found in everything from margarine to cookies and soap.

Bunge said it was looking at more opportunities in the edible oil sector but not of the same magnitude. Bunge and IOI Corp Berhad, the parent of IOI Loders Croklaan, started discussions on the deal two years ago.

Fitch and S&P Global said their ratings for Bunge remain unchanged after the announcement.

Reuters

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