CPPIB Goes on a Massive Agri Hunt?

Leo Kolivakis is a blogger, trader and independent senior pension and investment analyst. This post was originally published at Pension Pulse.

Jesse Riseborough and Javier Blas of Bloomberg News report, Glencore Plc sells $2.5 billion stake in agriculture business to CPPIB:

Canada’s largest pension fund agreed to pay US$2.5 billion for a minority stake in Glencore Plc’s agriculture unit as the commodity trader and miner works to reduce its debt burden.

Canada Pension Plan Investment Board will acquire a 40 per cent stake in the division which handles wheat, corn, barley, biofuels, cotton and sugar, according to a statement on Wednesday. The deal values the entire business at US$6.25 billion, below a US$10.5 billion valuation from Citigroup Inc. in September last year.

The price “was the low end of our valuation range, but it is not necessarily a disappointment,” said Ben Davis, an analyst at Liberum Capital Ltd. in London who advises holding the shares. “Cash through the door remains key for Glencore.”

The sale is part of a debt-cutting program Glencore Chief Executive Officer Ivan Glasenberg unveiled last year in a move to mitigate concern about the company’s capacity to pay down US$30 billion of debt as commodity prices tumbled. Canada Pension fended off other bidders that included Asian and Middle Eastern sovereign wealth funds and the state-owned Saudi Agricultural and Livestock Investment Co.

Stock Retreats

Glencore shares slipped 1.8 per cent to 139.30 pence by 11:08 a.m. in London. The company’s 588 million euros of notes maturing in April 2021 rose 1.8 cents on the euro to 93 cents, the highest since September, according to data compiled by Bloomberg.

The price “is lower than market expectations based on discussions with investors,” Goldman Sachs Group Inc. analyst Eugene King, who has a hold rating on the stock, wrote in a note to clients. The cash will help lower debt, but it will have minimal impact on the critical net debt to Ebitda ratio assessed by ratings agencies, he said.

Glencore has an option to sell as much as 20 per cent more in the business. Both Glencore and CPPIB can call for an initial public offering after eight years from the deal closing, expected to be in the second half of this year.

Food Trading

Glencore became a major agriculture player when it agreed to buy Canadian grain handler Viterra Inc. for $6.1 billion in 2012. With global network of more than 200 storage facilities and 23 ports, the company buys products from farmers, processors and other suppliers and sells to customers including local importers and government agencies.

The unit has gross assets of US$10.2 billion and generated earnings before interest, taxes, depreciation and amortization of US$734 million last year.

As the commodity collapse intensified in 2015, Glencore fought to reduce its debt burden, which totalled US$25.9 billion at the end of last year, by scrapping its dividend, closed mines and sold US$2.5 billion of new shares. Last month, the company pledged to cut net debt to as low as US$17 billion and raise as much as US$5 billion from selling assets.

“CPPIB have a proven track record in the sector and share our vision for the future growth of the business through value-creating organic and inorganic growth opportunities,” Glasenberg said in the statement.

Ag Deals

The transaction caps three years of intense deal making in the agriculture industry. Last year, Mitsubishi Corp. paid just over US$1 billion for a 20 per cent stake in food trader Olam International Ltd. Marubeni Corp., one of Japan’s top-five trading houses, bought U.S. grain merchant Gavilon Holdings LLC for US$2.7 billion plus debt in 2013.

Cofco Corp., China’s largest food company, spent more than US$4 billion over two years to build a global grain trader. It acquired the grains and oilseeds unit of Noble Group Ltd. and a majority stake in Dutch trader Nidera BV.

Glencore’s agriculture business “is now well-placed to take advantage of the significant opportunities that are expected to emerge across the sector in the coming years,” Mark Jenkins, senior managing director and global head of private investments at CPPIB, said in the statement. Agriculture is an “excellent fit” for a long term investor, he said.

Barclays Plc, Citigroup Inc. and Credit Suisse Group AG were joint financial advisers to Glencore. CPPIB was advised by Deutsche Bank AG.

Peter Grauer, chairman of Bloomberg LP, the parent of Bloomberg News, is a senior independent non-executive director at Glencore.

Ian McGugen of the Globe and Mail also reports, CPPIB to acquire stake in Glencore agriculture unit in $2.5-billion 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 $2.5-billion (U.S.) 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.

You can read CPPIB’s media release here. This is a great deal for CPPIB and I fully expect it to snap up another 20% in Glencore Agricultural Products which it has a right to do under the terms of the deal.

So why did CPPIB buy a big stake in Glencore’s agribusiness? Because it’s a very smart move for a mega pension fund with a very long investment horizon. Mark Wiseman and Mark Jenkins are scouring the globe to find attractively priced investment opportunities where they can invest a significant stake directly and when the bankers presented Glencore Agricultural Products, they wisely pounced on that deal.

Notice a pattern here? Last June, CPPIB bought a huge stake in GE’s lending arm, Antares Capital. That was its biggest deal to date — $12 billion USD — and it was backed up by $3.85 billion of the pension fund’s own money. This year, it is acquiring a 40% stake in Glencore’s agribusiness for $2.5 billion. And because of its size, it can do these massive deals on its own, a big advantage in these markets.

Also notice CPPIB is not worrying about hedge funds. That game is over, it’s for losers. Nope, CPPIB is using its comparative advantages — which include structural advantages such as a long investment horizon, scale and certainty of assets and developed advantages such as internal expertise, expert partners and a total portfolio approach — to invest massive amounts directly in very profitable businesses which offer stable cash flows over the long-run.

I’m being a little facetious here as I know CPPIB invests in a few large well-known hedge funds (you can view a list of its external hedge fund managers here) but the point I’m trying to make is the strategic focus isn’t on hedge funds, it’s on making large direct acquisitions of profitable business units of private or public companies that offer stable cash flows over the long run.

As far as Glencore, it’s shedding assets fast but it’s still reeling as there’s no end in sight to the deflation suspercycle which has pummeled commodities and leveraged commodity traders (like Glencore; see my comment on the secret club that runs the world).

The problem with Glencore is that it’s run by a bunch of cowboy commodity traders. It has some of the best commodity traders in the world but it’s focus is on short-term profits, not long-term growth (never mind what its CEO says publicly).

This is where CPPIB enters the picture. The conversation probably went something like this: “Boys, you blew your brains out taking highly leveraged commodity positions and now you’re on life support and need to shed assets to shore up your balance sheet. Let’s strike a deal” (again, I’m being facetious but with Glencore on the ropes, CPPIB got a great deal here).

And unlike Glencore, CPPIB has a long investment horizon, very deep pockets, and can sit and wait out this global stagnation cycle. No matter what happens, people still need to eat and agribusiness isn’t going to die.

Now, for individual investors, you might see this news release and think, “hey if CPPIB is buying part of Glencore’s agribusiness, it’s a good time to buy shares of agricultural stocks like Agrium (AGU), Mosaic (MOS) or Potash (POT).”

Why not? They’ve been hit hard and offer nice dividends too and now may be the time to buy and hold them for a very long time. Maybe but the problem is individual investors don’t have the staying power of a CPPIB to wait out a cycle which can last a very long time (what if global deflation takes hold?) and they could experience serious losses waiting for the cycle to turn (I continue to recommend steering clear of commodity, energy and emerging markets stocks).

It’s also worth remembering that CPPIB invests billions in both public and private markets which individual investors don’t have access to.

This is the reason why I want our politicians to get on with enhancing the CPP once and for all. It will allow Canadians to have their retirement nest egg managed by professional pension fund managers who can invest in top hedge funds and private equity funds but who can also make large direct investments in real estate, infrastructure, timberland and farmland.

In another deal that I forgot to mention, Brookfield Infrastructure Consortium to Acquire Assets of Asciano Limited, CPPIB, bcIMC and Singapore’s GIC were all part of the acquisition of Asciano, an Australian infrastructure company that focuses on transport including ports and rail assets, mostly through Patrick and Pacific National. The company provides details of this deal on its website:

On 15 March 2016 Asciano announced that it had entered into binding documentation with the “Brookfield Consortium” (Brookfield Infrastructure Partners L.P. (and certain of its affiliates) GIC Private Limited (and certain of its affiliates) and British Columbia Investment Management Corporation) and the “Qube Consortium” (Qube Holdings Limited, Canada Pension Plan Investment Board, Global Infrastructure Management, LLC (on behalf of itself and its managed funds and clients) and CIC Capital Corporation) in relation to the Joint Consortium Scheme including an implementation deed (Scheme Implementation Deed) and sale agreements in relation to Patrick’s container terminal business (Ports) and the Bulk & Automotive Port Services business (together BAPS).

Under the Scheme Implementation Deed, it is proposed that a vehicle (BidCo) owned directly or indirectly by CPPIB, GIP, CIC Capital, GIC and bcIMC (Rail Consortium), will acquire 100% of the issued capital of Asciano at $9.15 cash per Asciano share (reduced by the cash value of any permitted special dividend) (Scheme Consideration). The $9.15 Scheme Consideration represents the $9.28 per share announced on 23 February 2016, reduced by the amount of the interim dividend of $0.13 per share declared by Asciano on 24 February 2016 which is payable on 24 March 2016. The combined value of the $9.15 Scheme Consideration and the $0.13 interim dividend per Asciano share implies an enterprise value of approximately $12.0 billion.

The Asciano Board has considered the Joint Consortium Scheme in the context of the previously announced Qube Consortium proposal and unanimously recommends that Asciano shareholders vote in favor of the Joint Consortium Scheme in respect of all of their Asciano shares, subject to:

• Asciano not receiving a superior proposal; and
• an independent expert opining that the Joint Consortium Scheme is in the best interests of Asciano shareholders.

For further information please click through to the Takeover Proposal section of the website.

This is another great deal which positions bcIMC and CPPIB well for long-term global growth.

Photo by Andrew Seaman via Flickr CC License