Vice-President: Kester Low
Analysts: Saumya Shah, Aanya Chowbey, Park Seojune, Kostadin Iliev, Steven Brakespeare
Deal Overview
Acquirer: Bunge
Acquiree: Viterra @
Deal Size: USD$8.2 billion
Buy Side advisors: BofA Securities (financial advisor) and Latham & Watkins LLP (legal counsel)
Sell Side Advisors: J.P. Morgan (financial advisor)
Introduction
A $8.2 billion deal including debt is expected to close in mid-2024 and will bring Bunge closer on a global scale to leading rivals Archer-Daniels-Midland and Cargill. Viterra shareholders will receive about 65.6 million shares of Bunge stock. Combined, the companies account for about 23.7% of Brazil's corn exports and 20.9% of Brazil's soybean exports. The combined group will become a premier pure-play agribusiness solutions company well-positioned to meet global food demands. With substantial overlaps between Viterra and Bunge’s business activities, specifically in oilseed production, the deal could potentially yield huge synergies whilst the newly merged company becomes a market leader.
Business Overview
Bunge Overview
Bunge primary businesses are sourcing, refining and distributing agricultural commodities. With roots from over two centuries ago, it boasts a significant global scale and deeply rooted relationships. Bunge is currently the world’s largest oilseed processor and a leading producer and supplier of speciality plant-based oils. It was also the largest corn and soybean exporter from Brazil, which is the world’s top source of staple crops that end up as animal feed and biofuels. Bunge has a huge range of offerings and industrial applications, ranging from animal feed and pet food to biofuels and toddler nutrition. Bunge currently operates in over 40 countries globally with over 300 facilities and 23,000 employees.
Viterra Overview
Viterra is a privately held leading global trader of grain, oilseeds and meal. Following the acquisition of Gavilon from Marubeni in 2022, Viterra gained a leading position in physical grain handling in the US. Viterra is also the third-largest exporter of soybeans in Brazil and has a substantial presence in Australia and Europe. Viterra is also the world’s third-largest corn exporter and seventh-largest soybean shipper. Acquired by Glencore in 2013, it is a fully vertically integrated international agribusiness firm.
Industry Overview
The global agriculture sector plays a vital role in ensuring food security and contributing to the global economy. The main industry leaders by revenue include Cargill, BASF SE and Archer Daniels Midland Co., which far exceeds the shares of subsistence farmers. The main driving force of the industry is the significant population growth and demand for food in recent decades, resulting in quick expansions and intensification of agricultural activities. Consequently, economic growth has also resulted in demand for diverse and higher quality food products, further stimulating technological advancements in farming techniques, equipment and inputs to improve yields and efficiency.
Nonetheless, the industry is currently at a crucial crossroads in opting for more sustainable farming methods due to the significant negative ramifications that large-scale agricultural expansion continues to cause. In turn, this opens up various opportunities for the sector to evolve and realise untapped potential whilst striking a careful balance between meeting the rising global demand for food and minimising environmental impacts to ensure sustainable food production for future generations.
Financial Analysis
Dilution/Accretion Analysis
Interest payments will likely decrease net income till 2024, though synergies would then offset this when realised from 2025 onwards. Furthermore, Bunge has agreed to take on Viterra’s debt, and it is thus likely that the interest paid would increase for Bunge for the next few years. With such a huge merger, the synergies are expected to be realised in 2-3 years, which would mean financial benefits in terms of higher revenues and incomes for the combined entity thereafter.
It is evident that the Pro Forma EPS for the combined entity would be greater than the Actual EPS for Bunge for the coming years. In the first year itself, the combined business would have an EPS of $14.38, compared to the sole EPS of $10.83 for Bunge. Over the period of 5 years, the pro forma EPS increased by approximately 103%. While Bunge’s standalone EPS is $25.29 in the year 2026, the EPS for the combined entity is expected to be $29.23, representing approximately 15.6% higher earnings. One key thing to note is the EPS in 2024 and 2025 are nearly equal. However, in the next year (2026), the increase for Bunge is significantly less than the increase for the combined entity. This demonstrates that after 2024, Bunge’s EPS would increase, but at decreasing rates. For instance, the increase for Bunge in 2024-2025 should be around 20.6%, but in 2025-2026 it is projected to be approximately 1%. On the other hand, the pro-forma EPS would still increase noticeably. In 2024-2025, the projected increase is approximately 20.4%, and in 2025-2026, it is 16.7%.
Overall, it is clear that the combined entity would have higher net incomes and higher Earnings per Share than Bunge alone. The EPS for Bunge-Viterra increases at a greater rate than Bunge alone and is also higher in the coming years. This indicates that the deal is accretive and is a huge reason for Bunge to go ahead with the deal.
Pro forma financials for Bunge
Pro forma financials for Viterra
Comparable and Relative Valuation
Bunge was the largest corn and soybean exporter from Brazil, while Viterra was the third-largest corn exporter and seventh soybean shipper in 2022. This proves how both companies are significant players in the same industry. Subsequently, a CCA is a relevant form of relative valuation. Since Bunge is a public company, the analysis will primarily rely on the data available.
Given its geographical reach, operations and sectors, the chosen peer companies are:
Archer Daniels Midland Company
Ingredient Incorporated
New Hope Liuhe Co. Ltd.
Wilmar International
GrainCorp Limited
The table above summarises key financials and information from each company. As illustrated, Bunge Limited (BG)’s share price is above the average of its peers, and roughly on par with the two American companies listed (ADM and INGR). Bunge’s market cap and EBITDA suggests a healthy scope for growth, as well as stability as an organisation. Whilst its TEV is slightly below the industry average, the firm’s solid financial fundamentals and potential synergies in the merger will mean that there is huge potential for expansion and growth. In terms of ratios, Bunge’s EV/EBITDA places it in a good position compared to some competitors that could be overvalued.
Deal rationale and potential synergies
Both Bunge and Viterra are similarly in the business of sourcing and distributing agriculture. While Bunge also sources seed oils and refines a part of the commodities bought, the similarities between these two companies are considerable. With that in mind, it is quite clear that a merger between these two entities could lead to significant synergies when consolidating its operations, and lead to much greater efficiency and higher returns for investors.
Firstly, the potential value added on top of the acquired company’s revenue will be huge. Considering the need to hedge against potential downturns in the global agriculture market, stability through the acquisition of Viterra will be significant in ensuring stability. The deal will enhance origination capabilities of different regions and provide more key export origins for Bunge. This results in Bunge having greater adaptability to farming conditions, as well as greater market access.
Secondly, there are potential cost synergies and savings due to a reduction in risk. With a bigger variety of farmers to supply the crops, cheaper alternatives could be found much easier. Operational synergies in terms of consolidating teams and manpower would be significant too, and are estimated to reach $250 million annually pre-tax.
Lastly, there are synergies in terms of environmental, social and governance (ESG) efforts since this will bring Viterra under greater scrutiny -since Bunge is publicly traded. Both companies are already under huge investor scrutiny for deforestation risks in their supply chains since the combined entity will likely possess the largest deforestation footprint associated with soy globally. Additionally, Forest 500’s ranking of corporates’ deforestation commitments and implementation strategies revealed that Bunge and Viterra only obtained a ’soy score’ of 31/90 and 43/90 respectively and have even shown slight deterioration in recent years. Fortunately, though, Viterra has recently achieved a top 5 rating amongst more than 100 agriculture companies assessed in its first public ESG risk rating from Morningstar Sustainalytics in August 2023, and Bunge could certainly gain greater insights from Viterra in increasing ESG engagement with stakeholders. Furthermore, transformative changes can take place if the new entity adopts more conservative deforestation and land conversion policies together. Both companies are active members of the Soft Commodities Forum and adhere to the Amazon Soy Moratorium, making commitments to establish deforestation-free soy supply chains by the end of 2025. In all, the merged entity could consolidate its sustainability strategy and align efforts to create a more coherent strategy across the countries in which they possess a significant presence and perhaps make an even larger impact on ESG efforts in the agriculture sector.
Risks
The greatest risk would be environmental risks since Bunge and Viterra are both agribusinesses that rely on crop harvests that are increasingly susceptible to the impacts of climate change. Whilst the merger does open up huge potentials in terms of having greater crop origination sources, climate change and global environmental risks will still be important for Bunge to consider. To mitigate such risks, Bunge will need to implement comprehensive strategies to improve its supply chain resilience.
Additionally, with the increase in the adoption of regulations limiting sales of commodities linked to deforestation, there are substantial penalties for non-compliant companies. With both companies having substantial operations in soy production and export, there could be material risks to investors if the merged entity fails to adopt a cohesive policy on deforestation.
There are also risks of divestment since Argentina requires the combined entity to divest its assets if its market share exceeds the 40% threshold. However, the merged entity is now expected to be slightly under the threshold and could instead focus on the post-merger integration of the companies.
The deal’s completion cannot be guaranteed either, due to the scrutiny by regulators. This is particularly so due to the high concentration of the market amongst a limited number of players. Bunge also already owns a stake in another Canadian grain company — G3 Canada Limited — which was spun out of the Canadian Wheat Board. Nonetheless, this risk is less of a concern for the two firms at the moment.
Conclusion
Considering the potential growth of both Bunge and Viterra through the merger, there seem to be huge upsides to the deal. The EV/EBITDA ratio of Bunge is at 6.19, which is just above the EV/EBITDA ratio of the industry and hence, hints at a potential undervaluation of the firm.
Furthermore, the acquisition will largely be accretive with huge potential synergies. Risks such as environmental risks and bad crop harvests will be present nonetheless, and the merger will place them in a better position to mitigate the risks.
According to the Dilution / Accretion analysis, the combined entity will have higher net incomes and higher Earnings per Share than Bunge alone. The EPS for Bunge-Viterra increases at a greater rate than Bunge alone and is also higher in the coming year. This shows that the deal is accretive, and it shows that there are appropriate reasons for the deal being made.
Overall, the deal seems favourable for both Bunge and Viterra. Bunge will have a chance to grow its business into producing and marketing different types of primary commodities, and Viterra has a chance to be acquired and merged into a larger entity, allowing great synergies to be realised and creating an agricultural giant better positioned to take on larger competitors on the global stage.
References
Al Jazeera. (2023, June). US grain merchants Bunge, Viterra to merge to create giant. Retrieved from https://www.aljazeera.com/economy/2023/6/13/us-grain-merchants-bunge-viterra-to-merge-tocreate-giant
Bunge. (2021). Shareholder Proposal Regarding A Report On The Soy Supply Chain. Retrieved from https://www.sec.gov/Archives/edgar/data/1144519/000121465921004028/p47214px14a6g.htm
Bunge. (2023). Annual reports. Retrieved from https://investors.bunge.com/investors/financialinformation/annual-reports
Bunge. (2023, August). Bunge Limited to Hold Extraordinary General Meeting of Shareholders. https://www.bunge.com/Press-Releases/Bunge-Limited-to-Hold-Extraordinary-General-Meeting-ofShareholders
Bunge. (n.d.). Bunge. Retrieved from https://www.bunge.com/.
European Commission. (2022, December). Green Deal: EU agrees law to fight global deforestation and forest degradation driven by EU production and consumption. Retrieved from https://ec.europa.eu/commission/presscorner/detail/en/IP_22_7444
Forest500. (n.d.). Company Rankings. Retrieved from https://forest500.org/rankings/companies
Glencore. (2023, June). Viterra to merge with Bunge. Retrieved from https://www.glencore.com/media-and-insights/news/viterra-to-merge-with-bunge
Ng, J., Almeida, I., & Ribeiro, T. R. (2023, June). Trader Bunge to Buy Glencore-Backed Viterra for $8 Billion. Retrieved from https://www.bloomberg.com/news/articles/2023-06-13/us-crop-traderbunge-agrees-to-buy-glencore-backed-viterra#xj4y7vzkg
Real Agriculture. (2023, June). A Bunge-Viterra merger would require Competition Bureau review. Retrieved from https://www.realagriculture.com/2023/06/a-bunge-viterra-merger-would-requirecompetition-bureau-review/
Sen, A. & Plume, K. (2023, May). Grain trader Viterra in talks to merge with rival Bunge. https://www.reuters.com/markets/commodities/grain-trader-viterra-talks-merge-with-rival-bungesource-2023-05-25/
Terazono, E. & Pooler, M. (2022, January). Storebrand urges agricultural traders to act on Brazil deforestation risk. Retrieved from https://www.ft.com/content/136e52d2-f681-4839-b535- 31c28263866f
Viterra. (2022, October). Viterra completes its acquisition of Gavilon. Retrieved from https://www.viterra.com/Media/News/Viterra-completes-its-acquisition-of-Gavilon
Viterra. (2023). Financial information. Retrieved from https://www.viterra.com/Financial-information
Viterra. (n.d.). Sustainable sourcing implementation plan. Retrieved from https://www.viterra.com/dam/jcr:7449dcc3-2b43-4560-8db8-07d32fcf91f8/Sustainable-sourcingimplementation-plan---soy.pdf
WBCSD. (2022, December). Soft Commodities Forum progress report. Retrieved from https://wbcsdpublications.org/scf/wp-content/uploads/2022/12/SCF-Exec_summary_EN_v4-1.pdf
The opinions expressed in the reports are those of the members of the Junior IB team and are not affiliated with any university or institution. The financial recommendations provided are for educational purposes only and the Junior IB team takes no responsibility for any losses that may occur from implementing any ideas presented in the reports. The Junior IB team is not authorized to provide investment advice. The information, opinions, and estimates presented in the reports reflect the Junior IB team's judgment at the time of publication and are subject to change without notice. The price, value, and income of any securities or financial instruments mentioned in the reports may fluctuate. The Junior IB team has no business relationship with any of the companies mentioned in the reports and does not receive any compensation for their inclusion.
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