McCreath: CPPIB's Glencore buy a great deal
Canada Pension Plan Investment Board is buying a 40-per-cent stake in the agricultural trading unit of Glencore PLC for what appears to be an attractive price.
The US$2.5-billion price tag on the deal implies that the entire Glencore Agricultural Products business has an equity value of $6.25-billion, which is lower than many observers had expected. Analysts at RBC Capital Markets, for instance, had estimated the unit’s enterprise value (including $600-million of debt) at $7.5-billion.
CPPIB is paying a price that is equivalent to 7.5 times the unit’s estimated earnings for the next year before interest, taxes, depreciation and amortization, according to the RBC analysts. That is in line with, or slightly lower, than the valuation on publicly listed agricultural traders such as Archer-Daniels-Midland Co. or Bunge Ltd., which are trading at enterprise values between 7 and 9 times EBITDA.
CPPIB stands to do well if there’s a rebound in agricultural trading, the massive but shadowy business that oversees the sales, processing and transportation of huge amounts of staples ranging from wheat and soybeans to cotton and sugar.
The global business is dominated by the so-called ABCD group of companies, composed of Archer-Daniels-Midland, Bunge, Cargill and Louis Dreyfuss. The big food traders regularly produce large profits but the past year has been disappointing for them, as bumper crops and low volatility have dragged down revenues and profits. Both Archer-Daniels-Midland and Bunge have seen their share prices cut by a third.
Glencore made a major foray into agricultural trading in 2012, when it paid $6-billion for Viterra, the Canadian grain handler. However, Glencore Agri, as it’s now known, saw operating profits almost halved last year, to $524-million.
Still, the company is confident of the business’s long term potential. Ivan Glasenberg, chief executive of the giant miner-cum trader, made it clear in Glencore’s recent conference call that he wanted to sell only a minority stake in the business, and was seeking a partner or partners with the financial muscle to expand the business, particularly in regions where Glencore’s current operations are lacking. That fits in well with CPPIB’s stated interest in investing more in agriculture.
Analysts believe Glencore Agri would like to add acquisitions in Brazil and the United States. The deal announced Wednesday leaves a door open for Glencore to sell a further 20-per-cent stake in the unit, which could allow it to bring in yet another cash-rich partner.
It also allows either Glencore or CPPIB to call for an initial public offering of Glencore Agri after eight years. If valuations have improved by then, and the business has expanded, such an IPO could offer an attractive payback on the amount that CPPIB is paying today.