Commodity markets are bracing for a long-awaited deal that would create a US$25 billion behemoth capable of competing with the world’s biggest agricultural players.

U.S. crop merchant Bunge Ltd. is in talks with commodities giant Glencore Plc over a potential tie-up with its Viterra grains business. Following years of on-off talks, this time Bunge’s deal-making boss Greg Heckman, who oversaw a sharp turnaround at the once troubled crop trader, has the upper hand.

Combining the two would create a trader big enough to take on the industry’s elite: Minneapolis-based Cargill Inc. and Chicago’s Archer-Daniels-Midland Co. It would also complete Bunge’s renaissance under Chief Executive Officer Heckman, who transformed the company into a cash-rich oilseeds champion from an unprofitable business when he took over some four years earlier.

“The merger makes a lot of sense,” said Jonathan Kingsman, a former commodity trader who wrote the book Out of the Shadows: The New Merchants of Grain.  “You combine the biggest oilseed crusher in the world with a top grain trader.”

For most of its existence — since its formation in Amsterdam more than two centuries ago — Bunge was primarily a grain merchant. Its expansion to the Americas saw it become the B in the storied ABCD quartet of trading houses that dominated agricultural markets. The other members are ADM, Cargill and Louis-Dreyfus Co.

But its reign wouldn’t last. During years of crop surpluses that curbed the volatility traders thrive on, Cargill and ADM pivoted to more profitable sectors such as meat and animal nutrition. By contrast, Bunge and Dreyfus — where billionaire owner Margarita Louis-Dreyfus was focused on buying out other family members — struggled. 

From 2014 to 2018, the stock of St. Louis-based Bunge slumped about 35 per cent. After a wrong-way bet on soybean prices resulted in a surprise quarterly loss in 2018, activist investors at D.E. Shaw & Co. and Continental Grain Co. helped oust then CEO Soren Schroder. 

His replacement Heckman was carefully chosen for his trading and deal-making credentials, and for many years there was speculation the new chief was preparing Bunge for sale. At ConAgra Foods, Heckman oversaw the spinoff of the firm’s grain-trading unit into Gavilon in 2008, and later steered the $2.7 billion sale of Gavilon — now owned by Viterra — to Japanese giant Marubeni Corp. 

BUNGE TURNAROUND

At Bunge, Heckman spent years cutting costs, selling under-performing businesses and focusing on risk management. He focused on making Bunge an oilseeds giant, processing everything from soybeans to canola and sunflower seeds to make frying oil and animal feed. 

But instead of selling the trader, Heckman put Bunge back in the game: Its market value has gained about 80 per cent and the company is now sitting on a pile of cash. 

To be sure, the CEO has also been helped by forces outside his control. Bunge benefitted from both the boom in renewable diesel and Russia’s invasion of Ukraine, which allowed trading houses to profit from the turmoil and volatility in commodity markets. That backdrop also favors deals, Heckman said in an interview earlier this year.

“We’ve got the dry powder, we’ve got the firepower to do all those things,” the CEO said in February. “We’ve got the firepower to do a bigger deal if it makes sense, but things have got to make sense.”

While Heckman’s predecessor rebuffed Glencore’s approach to buy Bunge in 2017, this time the US trader is leading the charge. One option being discussed is a stock deal where Bunge shareholders would own a majority of the combined group, said people familiar with the talks.

Glencore, which has for years been reviewing ways to unlock value from Viterra, is open to deal with a competitor, CEO Gary Nagle said earlier this year. Other options for the non-core business — which has limited synergies with its wider metals, mining and trading operations — could include selling a stake to a new investor or pursuing the backup plan of an IPO, Nagle said in February.

GLENCORE VALUE

A merger offers Glencore the potential to monetize its 49.9 per cent Viterra stake, said Dominic O’Kane, an analyst at JPMorgan Chase & Co., who values that holding at $6.1 billion. The bank assumes Glencore would retain a minority shareholding in the combined entity, which could attract an equity value of about $25 billion. 

A deal would have to clear antitrust concerns. Bunge operates in more than 40 countries with over 300 facilities, while Viterra is present in 37 nations and has over 320 facilities. Most of their assets are complementary, but there is heavy overlap in places like South America and Canada.

While divestments would reduce potential synergies, the key test of any deal would only come when the boon of commodity market volatility dissipates, according to Chris Robinson, managing director of agriculture and commodities at TJM Institutional Services in Chicago. 

“The test of this merger won’t be if prices stay high,” he said. “The test will be if we have any deflationary pressures.” 

--With assistance from Thomas Biesheuvel, Ruth David and Dinesh Nair.