Marubeni to Borrow for Half of Gavilon Payment, Sell Assets

Marubeni Corp. (8002), set to buy Gavilon Group LLC for $3.6 billion, will raise loans to fund half the purchase and sell assets to reduce debt, Barclays Plc (BARC) and JPMorgan Chase & Co. (JPM) said.

The Japanese trading house will borrow about 140 billion yen ($1.8 billion) and use 150 billion yen of cash to buy the Omaha, Nebraska-based U.S. grain merchandiser, Tokyo-based Barclays analysts Kazuhisa Mori and Shogo Umeda said today in a report after a conference call with Marubeni executives yesterday. A Marubeni spokeswoman couldn’t be immediately reached for comment on the report.

“We expect this stance of asset-value reduction and efficiency enhancement to minimize the burden” on the balance sheet, Mori and Umeda said, maintaining an “overweight-1” rating on the stock.

Marubeni, whose businesses span Chilean copper mining, oil and textiles, will become the largest grain trader in the U.S. after Archer-Daniels-Midland Co. (ADM) following the deal, according to a presentation from the call posted on Marubeni’s website today. Marubeni will take on $2 billion of debt as part of the acquisition, its biggest.

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 targets reducing its debt-to-equity ratio to 1.8 times, Chief Financial Officer Yukihiko Matsumura told reporters in Tokyo May 29.

Asset Review

Marubeni is reviewing the assets that could be sold to cut debt after the Gavilon purchase, JPMorgan analyst Akira Kishimoto said today in a report based on the Marubeni conference call, which was closed to the media. The call “dispelled uncertainties” over how Marubeni will pay for the acquisition, he said.

Gavilon’s earnings before interest, tax, depreciation and amortization are expected to reach $600 million and after-tax profit to be $300 million in the fiscal year ending March 31, 2014, Mori and Umeda said in the report. Gavilon had 2011 sales of $17.9 billion, Marubeni said yesterday in an e-mail.

Marubeni paid a “reasonable” price for Gavilon that was on a par with Glencore International Plc (GLEN)’s C$6.1 billion ($6 billion) purchase of Canada’s Viterra Inc. in March, Mori and Umeda said. The ratio of Gavilon’s enterprise value to Ebitda was about 10 times, the Barclays analysts said.

‘Substantial Return’

“Marubeni should be able to secure about 16 billion yen in profits from this business in the year ending March 2014, and thus achieve a substantial return even in the initial stages,” Mori and Umeda said.

With Gavilon, Marubeni’s grain-handling volume globally will rise to 55 million metric tons, compared with Cargill Inc.’s 60 million to 70 million tons, Marubeni said yesterday. In terms of the U.S. business, Marubeni’s total will surpass Cargill, the Japanese trader said.

Grains accounted for 82 percent of Gavilon’s 2011 sales, with the rest coming from fertilizer and energy trading, according to Marubeni’s online presentation.

To contact the reporters on this story: Yuriy Humber in Tokyo at yhumber@bloomberg.net; Ichiro Suzuki in Tokyo at isuzuki@bloomberg.net

To contact the editor responsible for this story: Rebecca Keenan at rkeenan5@bloomberg.net

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