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Itochu Agrees to $1.9 Billion Food Tie-Up With CP Pokphand

Itochu Corp. (8001), Japan’s third-largest trading company, agreed to a business tie-up with Thai agriculture group Charoen Pokphand as the two companies seek to expand food supply in the world’s most populous region.

Itochu will buy an HK$6.6 billion stake ($852 million) in Hong Kong-based unit CP Pokphand Co. (43) and the Thai company will take 102.4 billion yen ($1 billion) of Itochu’s stock, the two companies said in separate statements. Itochu will also spend as much as 110 billion yen on a share buy back over the next year, the company said in its filing.

The cross shareholdings will help the two boost sales and cut the cost of buying raw materials as well as reduce asset running costs, Tokyo-based Itochu said today. The deal comes as rising disposable incomes across Asia and population growth has attracted international players to the local food industry.

Investing in CP Pokphand, which has a market value of $3 billion and produces animal feed in China and owns farms in Vietnam, will also help Itochu to boost earnings outside of so-called hard raw materials, such as the mining and trading of iron ore and coal amid sliding prices. Last year, Itochu bought Dole Food Co.’s Asian fruit and vegetable business and global canned foods unit for $1.3 billion.

Partnership Profit

Itochu expects an additional 4 billion yen to 5 billion yen in annual profit from the Thai tie-up in fiscal year ending March 31, 2016, Chief Financial Officer Tadayuki Seki said at a briefing in Tokyo today. The deal with help Itochu realize 10 billion yen of synergies, he said.

At the same time, the Japanese company will help bolster CP Pokhphand’s financial position and add its food marketing and distribution network in China, said Naree Apisawaittkan, an analyst at Phillip Securities Pcl in Bangkok, by phone.

“CP Pokphand is trying to expand into food products such as meat and ready-to-eat meals from animal feeds,” Naree said.

The partners will look at investments in grain elevators and animal feed among others, Itochu senior managing executive officer Koji Takayanagi said today at the briefing.

The Thai group will purchase Itochu shares via two companies, one of which will be a venture it plans to set up with the Development Bank of Japan. The transaction will make the Thai company Itochu’s third-largest shareholder with 3.8 percent, according to the Japanese firm’s statement.

Charoen Pokphand Foods Pcl (CPF) gained 1.8 percent to close at 28.75 baht in Bangkok, the highest level since June 6. Itochu fell 0.4 percent to 1,315 yen at the close in Tokyo, before the announcement. The stock’s up 1.2 percent this year compared with the 2.5 percent drop in the benchmark Topix index.

Food Empire

Led by Chief Executive Officer Masahiro Okafuji, Itochu is adding to a food empire that already boasts convenience store operator FamilyMart Co. (8028), cooking oil maker Fuji Oil Co., and wholesaler Nippon Access Inc., as well as joint investments with China and Taiwan processed food manufacturer Ting Hsin.

Food accounted for 50.8 billion yen, or 22 percent of Itochu’s net income in the year ended March 31, data compiled by Bloomberg show. Three years earlier, the company got 13 percent of earnings from food.

The alliance may expand to chemicals, information technology and finance, as well as food businesses in Asia, Itochu said.

Billionaire Brothers

CP Pokphand is controlled by Thai billionaire Dhanin Chearavanont, who together with his brothers turned a family business into the nation’s largest agricultural group, making animal feed and operating farms that produce piglets, broiler chicks, table ducklings, shrimp and fish. They have also moved into retailing, telecommunications and real estate, and expanded to Indonesia, India, Vietnam and Turkey.

Dhanin has a net worth of $2.4 billion, according to the Bloomberg Billionaires Index. When Chinese leader Deng Xiaoping opened the country’s economy in 1979, his family’s Charoen Pokphand Group was its first foreign investor, registering its business there as No. 001.

The connection was cemented almost two years ago when the group invested $9.4 billion to become the largest investor in Hong Kong-listed Ping An Insurance (2318) Group Co., China’s second-biggest insurer.

Chinese and Hong Kong-listed firms last year spent the most in a decade to buy or invest in food, drink or farming assets, data compiled by Bloomberg show. Itochu’s domestic rival Marubeni Corp. (8002) paid a company record $2.7 billion last year for U.S. grains collector Gavilon Holdings LLC.

Charoen Pokphand Foods in November 2011 paid $2.1 billion for a 74 percent stake in affiliated CP Pokphand.

To contact the reporters on this story: Yuriy Humber in Tokyo at yhumber@bloomberg.net; Anuchit Nguyen in Bangkok at anguyen@bloomberg.net

To contact the editors responsible for this story: Jason Rogers at jrogers73@bloomberg.net Madelene Pearson, Linus Chua

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