Marubeni Corp. (8002) agreed to buy Gavilon Group LLC, the third-largest U.S. grain merchandiser, for $3.6 billion in what would be the Japanese company’s biggest deal.
The purchase will double its grain-trading capacity, Tokyo-based Marubeni said today in a statement. The company will use cash and loans to fund the deal and take on Gavilon’s $2 billion of debt, Chief Financial Officer Yukihiko Matsumura told reporters today in Tokyo.
Buying Omaha, Nebraska-based Gavilon will allow Japan’s biggest agricultural trader to expand in the world’s largest producer and exporter of corn and compete with Cargill Inc. and other top global grain traders. The acquisition also strengthens Marubeni’s position in supplying food to Asia, said Daisuke Okada, the company’s managing executive officer.
“Marubeni’s purchase of Gavilon will give it an inroad into grain purchases in the U.S. and put it on par with the leader Cargill,” said Justin Tang, a Singapore-based analyst at Churchill Capital. “The performance of the stock today is reflective of investors’ positive expectations.”
Marubeni gained 2.6 percent to 517 yen in Tokyo today, while the Nikkei 225 benchmark index rose 0.7 percent.
Gavilon traces its roots back to Peavey Co., acquired by ConAgra Foods Inc. (CAG) in 1982. Gavilon took its current form when ConAgra sold its trading and merchandising operations in 2008 to a group including Ospraie Management LLC, the commodities hedge-fund firm founded by Dwight Anderson, for $2.75 billion including debt.
Orascom Construction Industries, Egypt’s biggest publicly traded builder, said today in a statement on its website that one of its unit agreed to sell its 16.8 percent stake in Gavilon to Marubeni for $604.8 million.
In addition to selling grains, Gavilon’s businesses include fertilizer distribution and energy trading. It has about 2,000 employees in 300 locations on six continents, it said in a March 7 statement.
There have been 515 purchases valued at $51.3 billion this year in the agriculture and food industries, with Japanese companies the third most acquisitive after those in Switzerland and the U.S., according to data compiled by Bloomberg. Japan’s companies didn’t feature in the top five for last year’s $133 billion worth of deals, the data show.
Biggest Foreign Takeover
The Gavilon acquisition, which Marubeni said is due to be completed in September, would be the biggest takeover abroad by a Japanese company in a year, according to data compiled by Bloomberg. Companies including Glencore International Plc (GLEN), Bunge Ltd. (BG), Mitsui & Co. and Mitsubishi Corp. had also shown interest in Gavilon, people familiar with the matter said May 8.
Marubeni’s 25 million metric tons of grains trading capacity will rise to 55 million tons with the Gavilon deal and also add gas and oil trading volumes, the Japanese trader said.
“As part of a larger trading organization, Gavilon will be well-positioned to more efficiently connect supply with growing global demand,” Greg Heckman, chief executive officer of Gavilon, said today in a separate statement.
Glencore, which in March agreed to buy Canada’s Viterra Inc. for C$6.1 billion ($6 billion), expects Asia to drive annual growth of as much as 3.5 percent in global grain and oilseed demand. Mitsubishi (8058) Chief Executive Officer Ken Kobayashi said April 18 that growth in food demand in line with expanding populations and incomes in Asia will make it one of the key businesses for Japan’s biggest commodity supplier.
Marubeni had net debt of $23.1 billion as of March 31, equivalent to 2.08 times its equity, according to data compiled by Bloomberg. Marubeni CEO Teruo Asada today reiterated the company’s target to reduce its debt-to-equity ratio to 1.8 times.
Marubeni could sell some of its infrastructure and machinery assets to help buy Gavilon while preserving current debt levels, according to JPMorgan Securities Japan Co. If Marubeni buys Gavilon without selling new shares or selling assets, its ratio of debt to equity may rise to 2.3 times, which is “manageable,” JPMorgan analyst Akira Kishimoto said in an interview earlier this month.
“This will be a very large portion of their annual capex,” Polina Diyachkina, an analyst with Macquarie Group Ltd. in Tokyo, said of Marubeni’s purchase. “We should be concerned how they’re going to finance it.”
Buying Gavilon, which has a lower credit rating than Marubeni, would “weaken the balance between Marubeni’s risk volume and capital,” Standard & Poor’s rating company said May 9. S&P rates Marubeni BBB, the second-lowest investment grade, with a stable outlook. Gavilon has a non-investment grade BB rating with a stable outlook.
Morgan Stanley (MS) and law firm Jones Day advised Gavilon on the transaction and Marubeni hired Nomura Holdings Inc. Gavilon hired Morgan Stanley to explore strategic alternatives, a person familiar with the matter said Jan. 20.
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