Bunge Best Hope Seen With Sugar Bid From Brazil: Real M&A

Bunge Best Hope Seen With Brazil Sugar Bid From Cosan
Bunge’s mills have the capacity to crush more than 20 million metric tons of cane a year, making it the largest processor of the crop in Brazil after Cosan, Abengoa Bioenergia and Louis Dreyfus Commodities BV’s sister company Biosev SA, according to Michael Cox, an analyst at Piper Jaffray. Photographer: Dado Galdieri/Bloomberg

Bunge Ltd. may look to Brazilian buyers as it seeks options for the sugarcane-milling business that has been a drag on earnings for three years.

The agricultural commodity processor, which bought its first sugar mill in 2007, said yesterday it will explore a “full range of options” for the milling division. With Bunge projecting the unit will be profitable next year, large Brazilian sugarcane processors such as Cosan SA Industria & Comercio and Abengoa SA may be interested in all or parts of the operations to add capacity, said Piper Jaffray Cos., which estimates a sale could fetch as much as $2.5 billion.

“It’s been a disappointment,” Bryan Agbabian, San Francisco-based sector head for agricultural equities for Allianz Global Investors, which oversees more than $400 billion and owns Bunge shares, said in a phone interview. “They’ve spent a lot of money on sugar and haven’t shown results. It would be better, if it’s not working out, to sell it.”

After missing analysts’ sales estimates in five of the last six quarters, Bunge trades at an 81 percent discount to its revenue, the worst price-sales ratio among its agricultural product peers, according to data compiled by Bloomberg. The company, which gets the majority of its revenue from trading and processing soybeans and grains and has a market value of $11.8 billion, is evaluating alternatives for the sugar business as prices for the sweetener have risen 19 percent since reaching a three-year low in July.

Sugar Beginnings

Bunge Chief Executive Officer Soren Schroder, in a phone interview yesterday, declined to say when the review of the sugar business will be completed and whether divesting the unit is among the options the company is considering.

The White Plains, New York-based company entered the sugar market as a trader in 2006 and then expanded into cane milling. In the past five years, Bunge has invested about $3 billion in building its refining business, Michael Cox, an analyst at Piper Jaffray, said in an Oct. 1 report.

Bunge’s mills have the capacity to crush more than 20 million metric tons of cane a year, making it the largest processor of the crop in Brazil after Cosan, Abengoa Bioenergia and Louis Dreyfus Commodities BV’s sister company Biosev SA, according to Cox. The mills produce both sugar and ethanol.

Bunge’s sugar unit hasn’t generated annual operating income since at least 2009, and the company said yesterday third-quarter losses at the division more than doubled to $19 million from a year earlier.

Widening Losses

The losses have been a drag on overall earnings. Bunge fell short of analysts’ third-quarter sales estimates by more than $2 billion. The company now trades at 0.19 times its $62 billion in sales the last 12 months, a cheaper price-sales multiple than every agricultural products company valued at more than $1 billion, according to data compiled by Bloomberg.

Today, Bunge shares rose 2.9 percent to $82.39, the highest closing price in five years. The gain was the biggest in six months.

Schroder, who became CEO in June, said yesterday that factors out of the company’s control, such as weather and government fuel policies in Brazil, have made it “very difficult” to project results. Shareholders have expressed concern about the unit’s ability to generate appropriate returns, he said.

“We have to be realistic,” Schroder said. “We are not satisfied with the status quo and we are active in pursuing alternatives that put us in a better spot, whatever that ends up being. We don’t know that yet.”

Ralph Whitworth

Relational Investors LLC, the activist investor led by Ralph Whitworth that’s successfully pushed for changes at companies from Timken Co. to Illinois Tool Works Inc., said in August it had amassed a 4.1 percent stake in Bunge.

Relational had been prodding Bunge to sell or spin off its sugar unit and refocus on its core business, according to a person familiar with the matter, who asked not to be identified discussing private conversations.

Amid a weakened sugar market and a government cap on gasoline prices that affects ethanol prices, the economics of the business have been poor, Ali Miremadi, a fund manager at London-based Taube Hodson Stonex Partners LLP, which held Bunge shares as of Sept. 30, said in an e-mail.

“Even in the longer-term a refining business such as this is not as valuable as Bunge’s core agri business,” said Miremadi, whose firm manages about $5.5 billion in global equities.

Cosan, Abengoa

After hitting a three-year low on July 16 amid projections for a surplus, the most-active sugar futures in New York have since risen 19 percent as rain reduced output in Brazil’s main growing region and a fire at a port in the country destroyed thousands of tons of sugar.

While potential acquirers may hesitate over the next six to 12 months because of some uncertainty on how the Brazilian government will act on gasoline prices, “there is an interest among the larger consolidators to grow capacity” longer-term given growth dynamics for sugar and ethanol, Piper Jaffray’s Cox said in a phone interview this week before Bunge’s review was announced.

Cane processors such as Cosan and Abengoa Bioenergia, a unit of Spain’s Abengoa SA, could be potential acquirers for all or part of the assets, and a likely scenario could be that a consortium of buyers emerges to divvy up the mills, Cox said.

Sao Martinho SA or Cosan could be “logical acquirers,” said Agbabian at Allianz.

Price Limit

Representatives for Sao Martinho and Raizen Energia SA, Cosan’s joint venture that runs its sugar-cane operations, said the companies don’t comment on speculation.

Abengoa SA said today in an e-mailed statement that it “denies news stating its involvement in the potential acquisition of Brazilian sugar mill assets from Bunge.”

Difficult market conditions may limit Bunge’s ability to extract a high price, said Tom Graves, a New York-based equity analyst at Standard & Poor’s.

Bunge shouldn’t sell the sugar division for less than $3 billion, according to Steve Laveson, a fund manager and analyst at Portland, Oregon-based Becker Capital Management Inc., which oversees about $2.4 billion and owns Bunge shares.

The company expanded the business when sugar prices were higher, and selling when prices are lower would “compound their mistake,” Laveson said in a phone interview.

The price Bunge originally paid for the mills implies a current value of about $2.1 billion, while it may cost as much as $3 billion for a company to build Bunge’s operations from the ground up, Ann Duignan, a New York-based analyst at JPMorgan Chase & Co., wrote in a report yesterday.

“There are no doubt commodity players who will see longer term value in Bunge’s sugar business,” said Miremadi of Taube Hodson Stonex. “The assets are sound and current conditions will not persist indefinitely.”


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