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Consolidating grains

12 Mar 2012 By Kevin Allison

Ivan Glasenberg seems to like difficult deals. The chief executive of commodity trader Glencore is still trying to win over shareholders in Xstrata to a proposed $90 billion merger with the miner. But he is potentially also in the market for a smaller but no less challenging acquisition, of Canadian grain handler Viterra.

Agriculture is a growing part of Glencore. Buying Viterra would make strategic sense. The assets are attractive, and the expected liberalisation of Canada’s wheat market in August means a deal would be opportune. As with Xstrata, the apparent logic would be to shunt the target’s production through Glencore’s global trading machine, giving the firm more scope to exploit commodity market inefficiencies around the world.

The mooted price seems about right. Glencore is proposing a possible offer in the region of $5.5 billion, the Sunday Telegraph reported. Add net debt and that would represent an enterprise multiple of about 9.3 times expected fiscal 2012 EBITDA, based on Reuters consensus estimates. That’s broadly in line with other recent agriculture deals.

But if Glencore proceeds, it may find it hard to avoid being bid up in an auction. The planned ending of the Canadian Wheat Board’s seven-decade monopoly on wheat and barley marketing has piqued international interest in the sector. Cargill, with about 13 percent of Canada’s breadbasket, might relish the opportunity to roll up its biggest rival. It would also probably be able to extract more synergies from a deal than Glencore, whose existing agricultural portfolio lies outside Canada.

A still bigger challenge is politics. While a transaction would be worth only about 13 percent of Glencore’s current market value, it would be material in other ways – roughly doubling Glencore’s revenue from agricultural commodities and giving it 45 percent of Canada’s grain deliveries, along with a significant chunk of the related infrastructure. Less than two years since Canada’s government blocked BHP Billiton’s hostile takeover of Saskatchewan’s Potash Corp, agricultural resources appear to be as touchy a subject as ever. If Glencore has a relative advantage, it may only be that it is seen as a less problematic buyer than rivals.


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