Under the stewardship of Mick Davis, Xstrata grew from a collection of niche assets with a collective market capitalisation of $500 million to a leading mining firm worth $50 billion in the space of ten years.
Its initial public offering in 2012 was seven times oversubscribed and up until its $90 billion merger with Glencore in 2013, Xstrata had driven around 40 merger and acquisition deals.
Ivan Glasenberg, ceo of the Switzerland-based commodities trader and producer, says that its plan in agriculture is similar to the early days of Xstrata, in which it initially owned a 40% stake. At the time of its merger with the mining firm, Glencore had pared that stake down to roughly 34%.
Glencore runs its agricultural commodities business through a relatively new partnership with two Canadian pension funds - Canada Pension Plan Investment Board with a 40% stake and British Columbia Investment Management Corp with a 9.9% interest. Known as Glencore Agriculture Ltd, the business was established at the end of 2016.
“The idea was to grow Glencore Agriculture and have this partner in the same way we set up Xstrata in the early years, [which was] to set up a vehicle where we would not be doing all the funding, to grow in the mining sector at the time where we had the public owning 60% and Glencore owning 40%, where we could leverage that vehicle, and if equity was required we didn’t have to put it all up ourselves,” Glasenberg says.
“We’re just doing the same in the agriculture sector, where this vehicle is set up – it’s performing nicely,” he adds.
Replicating this kind of ambitious growth in agricultural commodities is not out of the question, but the acquisition targets are a little more limited.
Based on current share prices, listed firms ADM and Bunge have market capitalisations of around $24 billion and $11 billion, respectively. Cargill and Louis Dreyfus are not listed, however, and valuations of their physical businesses are tricky for investors to get their heads around, as Glencore itself discovered when it had its own initial public offering in 2011.
Glencore has already made an informal approach to Bunge, but was rebuffed back in May. Glasenberg says he is not able to talk about Bunge – a situation in itself that suggests there is more going on behind the scenes than is publicly known – so cannot tell shareholders why he feels the USA-headquartered company would be a good fit, or whether Glencore would stay friendly or go hostile in a future deal.
For its part, Bunge is obviously taking Glencore seriously, and has hired a team of lawyers and bankers to shore up its defences and consider its future strategic options.
Glasenberg has spelled out the key components of any future deal, which he says would be opportunistic: “It depends on entry point, price, the required rate of return (RRR), and where we predict the forward price,” he notes.
Reading between the lines, however, what is attracting Glencore to Bunge is the agriculture firm’s position in the USA.
“We have a very strong agriculture business in certain countries all over the world, but we’re not well set in the USA. As you know in the USA we don’t have much infrastructure and to be able to be active in the agriculture business, it is an infrastructure game – you have to own infrastructure so you can source from the farmer and then get it through the system to get it on board vessels,” Glasenberg says.
“We do need infrastructure and in the USA, we’ve said we have various different opportunities; it’s not fully consolidated in various areas, there are small operators, smaller companies operating in that area, and it’s not fully consolidated in particular countries. If we can see an opportunity to consolidate there and get involved … we continue looking in those areas,” he adds.
There are smaller potential targets like Asia-based firms Olam, Wilmar International and Sinar Mas, although their presence in the USA is less evident when compared to Bunge.
Glencore made a push into grains when it acquired Canadian grain handling firm Viterra in 2012, a friendly deal worth C$6.1 billion ($4.8 billion) that gave it a stronger footing in Canada and Australia.
But efforts since then, including talks with Louis Dreyfus, have so far failed to produce the next big step. The next significant move was to establish Glencore Agriculture; Glasenberg says he’d be willing to dilute the firm’s 50% stake in the venture “for the right reasons,” just like Glencore did with its interest in Xstrata.
It has also got some flexibility on its $13.9 billion net debt, which has what the company describes as a “robust cap” of $16 billion but with leeway to go higher if a deal requires it.
Given Glasenberg's reluctance to talk about its approach plus Bunge's own defensive reaction, some kind of deal with the agriculture company may not have yet died a death. Clearly Glencore’s ambitions in agriculture have only just begun.