Olympian Expands Glencore's Empire With Emerging Food Colossusby
Mahoney challenges century-long hold on market by ABCD quartet
Glencore is already the world’s top wheat and pulses merchant
Dockside in Rotterdam, the European logistics ace for Glencore Agriculture gives up trying to remember all the workers and contractors who made it possible to fill a 30-wagon train with soybean meal from Argentina.
“Lots of them,” Hajo Barth finally says as a loader dumps a scoop onto the conveyor feeding one of the wagons, which weighs 56 metric tons.
It’s been two months since Glencore sent the India-flagged bulk carrier Jag Arya up the Parana, South America’s second-longest river, for loading at its massive Argentine crushing facility in Timbues. In another week, a trans-Atlantic supply chain that stretches 12,000 kilometers (7,500 miles) will terminate at a railway junction inside the Czech Republic.
The whole process highlights how close Glencore, the Swiss commodities giant best known for its metals and oil operations, has come to joining the food-trading elite. It’s seeking to break the century-long dominance of the industry held by the so-called ABCD quartet -- Archer-Daniels-Midland Co., Bunge Ltd., Cargill Inc. and Louis Dreyfus Co. The head of Glencore Agriculture, Chris Mahoney, says by at least one measure, weight, the company already has.
"I think it’s very much ABCD and G now," Mahoney, 58, said in his office in central Rotterdam, just inland from Europe’s biggest port.
Glencore Agriculture owes its independence to its parent’s existential crisis in late 2015 as commodity prices plunged and debt concerns sent the stock tumbling to a record low. Glencore Plc’s market value in London has more than quadrupled to about 42 billion pounds ($54 billion) since early last year, after it sold almost half of Mahoney’s division and raised cash from shareholders.
Since taking over Glencore Agriculture in 2002, the former Cargill executive has overseen the transformation of the unit into a standalone enterprise that generates more revenue from owning fixed assets in strategic locations than simply trading. Today he operates storage facilities and plants from Bahia Blanca in Argentina and Prince Rupert in Canada to Port Lincoln in Australia and Rostov-on-Don on the Russian Black Sea shore.
While his biggest shortcoming so far has been his inability to break into the largest market of all, the U.S., Mahoney has a track record of overcoming obstacles. He won a silver medal in rowing at the Moscow Olympics in 1980, when Margaret Thatcher let individual British sports authorities decide whether to join the U.S. boycott over the Soviet invasion of Afghanistan.
"We look at ADM, Bunge and Cargill and we see they trade 50 to 100 percent more tons than us,” Mahoney said. “Our broad objective is to establish a company with that kind of size over the next decade or so.”
To achieve that, Glencore Agriculture plans to invest more, issue bonds on its own for the first time as soon as next year, and potentially buy other companies that control silos, ports and crushing facilities. As markets become more transparent, pure trading becomes less profitable, he said.
Assets are the key, according to Jean Francois Lambert, a consultant and former head of global commodity trade finance at HSBC Holdings Plc.
"The only thing that can make a difference is to develop either a strong industrial base or to integrate a whole supply chain from fields to consumers," Lambert said in an interview in London.
Glencore, founded by the late tycoon Marc Rich in the 1970s and now run by billionaire Ivan Glasenberg, built its agribusiness through a mix of acquisitions and organic growth, starting with the purchase of Dutch grain trader Granaria Group in 1982. It remained largely a trader until Mahoney arrived two decades ago and started buying inland grain elevators in Ukraine and other countries.
Glencore catapulted into the top league of grain brokers with the acquisition of Canadian handler Viterra Inc. for C$6.1 billion ($4.8 billion) in 2012, beating out ADM. Later, the trading house sold significant parts of Viterra, such as its pasta-making division, and held on to its infrastructure.
Mahoney called the addition of Viterra, which almost overnight turned Glencore into the world’s largest trader of wheat and so-called pulses like lentils and chickpeas, a “transformational event.”
With a global network of silos and ports, Glencore Agriculture no longer relies on extreme price swings to make money. Last year, the share of basic trading in the company’s overall earnings fell to 15 percent, an all-time low.
Still, there were some major misfires. In 2011, Glencore lost more than $300 million trading cotton after it tried to expand too quickly by hiring a team from a rival, wiping out an entire year’s worth of profits.
"The lesson of cotton is that it’s best to build from within,” Mahoney said.
The next milestone came last year, when Glencore sold 49 percent of its agribusiness to two pension funds -- Canada Pension Plan Investment Board and British Columbia Investment Management Corp. -- for $3.1 billion in part to fund an aggressive debt-reduction plan. At the last minute, the Canadian funds beat a bid from a Saudi state-owned company, which was also trying to buy a stake in Glencore Agri.
The sale created a new company with its own balance sheet, which isn’t guaranteed by Glencore itself. The business reported earnings before interest, taxes and depreciation, attributable to Glencore, of $592 million last year, compared with $830 million for Dreyfus, the smallest of the ABCD companies.
Mahoney now has his eye on the capital markets to fund further growth as Chinese trading houses go global. He said he plans to seek a “strong” investment-grade rating later this year "as a first step for bond offerings in the future.” The company has about $600 million of long-term debt, allowing it to easily borrow another $1 billion and still meet its parent’s targets.
As part of its deal with the Canadian pension funds, an initial public offering is also on the cards, although not before 2025. "The objective is to create value and an IPO is a way to realize value, but there are other ways," Mahoney said. "I don’t think the objective is to go public per se."
Mahoney said he’s not shopping for acquisition’s for growth’s sake, but he also admits that not having U.S. assets leaves a major hole in Glencore’s network. "If we could fill the gap and adhere to our returns threshold, we will do it, but it’s proving not so easy," he said. “We have looked in the U.S., it’s no secret. There aren’t any willing sellers.”
Glencore once looked at medium-sized U.S. grain companies such as Gavilon Group LLC, a merchant owned by Japanese conglomerate Marubeni Corp., The Anderson Inc., Scoular Co. and Lansing Trade Group LLC as potential acquisition targets. Earlier this week, Glencore said it bought a silo in North Dakota from Gavilon, a relatively small deal that signals its appetite for American assets.
Glencore is renowned for its deal-making drive, so industry executives, consultants and bankers are near unanimous in expecting Mahoney to try to strike a major deal at some point. In 2011, just before Glencore Plc’s $10 billion IPO, it explored a merger with Louis Dreyfus, but the companies were several billion dollars apart, according to people familiar with the matter.
Mahoney now has a lot of catching up to do if he wants to truly end the ABCD era. Bunge was founded in 1818, Dreyfus in 1851, Cargill in 1865 and ADM, the youngest of the four, in 1902, nine decades before Glencore Agriculture.
"We’re a 20-year-old company in a sector in which all our major competitors are at least a century old," Mahoney said.
Peter Grauer, the chairman of Bloomberg LP, is a senior independent non-executive director at Glencore.