Traders are meant to be good at picking the right time to sell, so it's no surprise that Glencore just got rid of another 10 percent of its agriculture business.
Prices for sugar, soybeans, sunflower seeds and canola -- as well as coffee, which Glencore doesn't deal in -- are all hovering around multi-year highs. Since Bloomberg first reported the planned stake sales last September, agriculture has been the best-performing sub-set of the Bloomberg Commodity Index. That suggests now is a good time to be offloading a business that's never been a major contributor to the bottom line.
Both deals value the entire business at $6.25 billion in equity, which comes to an enterprise value of $9.85 billion adding the $3.6 billion in net debt as at Dec. 31. At about 13 times the unit's $734 million 2015 Ebitda, that's a sliver above the 12.2 times multiple in comparable deals over the past three years .
Are Canada's retirees being sold a pup? It's tempting to think so, given the run-up in commodity prices. But if your investment horizons are measured in decades, farm products actually look pretty cheap. The sale price was effectively struck at the time of the Canada Pension Plan deal back in April, when the Bloomberg Agriculture subindex was at 53 -- not far above its record-low 48, and well below the average of 81 since it was first compiled in 1991.
While agriculture is a low-margin industry whose profits are notoriously volatile year-to-year, the big four traders -- Archer-Daniels-Midland, Bunge, Cargill and Louis Dreyfus -- also very rarely lose money, an attractive feature for an annuities business. Glencore's agri division is arguably big enough to be considered alongside those firms, with its Ebitda level-pegging that of Louis Dreyfus over the past two years:
Other assets really ought to be ahead of agriculture in the divestment queue, such as coal -- but of course, there are no buyers for that. Reducing the exposure to agriculture, the company's most marketing-heavy division, also leaves it more dependent than ever on its capital-hungry industrial mining businesses. Still, what Chief Executive Officer Ivan Glasenberg needs most right now is cash.
Glencore's stock has gained 61 percent this year, making it the best performer in the Bloomberg Europe 500 Metals and Mining index after Anglo American.
That in many ways reflects a rebound from the brink-of-doom conditions it was facing at the end of 2015, and the picture on the credit side is less bullish.
Glencore's $1.5 billion of 4.125 percent notes are still trading at less than 90 cents on the dollar, while credit-default swaps protecting its debt against nonpayment are at 420 basis points, more than double the perceived risk of BHP Billiton or Rio Tinto. Glencore may be leaving its farmland behind, but it's not out of the woods yet.
(Peter Grauer, the chairman of Bloomberg LP, the parent of Bloomberg News, is a senior independent non-executive director at Glencore.)
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
Based on 16 deals worth more than $100 million in the agriculture, grains and sugar industries over the past three years for which Bloomberg has data. We've excluded tobacco transactions, which tend to go for higher multiples.
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