Glenboden M & A Originations

Some acquisition options for an ascendant Cargill in ingredients, cocoa and poultry

Priority Rating priority rating 3
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Origination Status statement of acquisition intent by company President, November 2008
Asset candidates include Tate & Lyle (ingredients), Barry Callebaut (cocoa), Pilgrim’s Pride (poultry)
Buyer Cargill Inc. (USA), global food, agriculture and risk management provider
Seller shareholders of above (all public companies)
Buyer Rationale opportunism in economic downturn, alternative to capital expenditure
Seller Rationale indebtedness, margin pressures, shareholder returns
NBs Cargill is targeting all its core businesses including ‘starch, vegetable oils and fats’
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Cargill is one of those global US giants that remain privately held. As such it doesn’t suffer from the same results pressures as its publicly –listed competitors; it’s therefore able to make good value acquisitions in economic downturns, when its peers are having to juggle high debt levels, tighter margins and unrelenting shareholder expectations of capital gains. So, into 2009 we can expect Cargill to deliver on its declaration regarding acquisitions. Potential targets are very numerous; we select three attractive and growing groups that could benefit from Cargill’s greater scale.

Broadly, Cargill is a diversified producer and trader of agricultural commodities and foodstuffs, mostly for industrial and institutional customers, covering grains, seeds, fertilizers, ingredients and meats. That means it’s benefited enormously from the surge in commodity and farm input prices recently, as shown by its FY 2008 sales growth of 35% (to $ 120 bln) and net earnings growth of 55% (to $ 4 bln), growth that’s continued into fiscal 2009.

The group seems to now be targeting companies that have suffered from these high materials costs, and whose acquisition in the current environment might be a cheaper alternative to capital expenditure that’s soared at Cargill since 2006.

Tate & Lyle is an international ingredients producer, based in the UK, for whom sugar and corn (maize) are the main inputs. Having been affected by the high prices of these commodities, especially in Europe, the group has seen a decline in profitability in H1 2009; although sales grew in that period by 25% to reach 1,7 bln GBP, as cost increases were passed on in higher prices, the group’s EBITDA increased by less than 5%. Meanwhile net debt increased by 8% to reach 1,13 bln GBP, equivalent to nearly x5,5 EBITDA.

At the same time Tate & Lyle is an efficient and fully –invested producer of starch and sugars, coming to the end of a four-year capex round, with a strong business in the Americas in particular; these features could make it an attractive fit for Cargill.

Switzerland’s Barry Callebaut is the global leader in industrial cocoa and chocolate products, with outsourcing and retail businesses also (Stollwerck brand). Although its balance sheet appears to be stronger than that of e.g. Tate & Lyle, with net debt in FY 2008 of only x2,3 EBITDA, its indebtedness is also increasing.

More significantly, its profitability has also been hit by higher raw material prices; in FY 2008 turnover grew by 17%, to reach 4,8 bln CHF, but EBITDA grew by only 4% and now stands at under 10% of sales. Operating profit actually declined in Europe, where Callebaut derives 75% of its total revenues. This is very out-of-line with the group’s financial target of 11-14% growth in EBIT per annum through to 2011.

At the same time, Callebaut is an attractive business for Cargill, because of its global leadership, well –invested asset base and expansion surge in Asia (including China). On top of that, Callebaut is Cargill’s main global competitor for buying the annual cocoa harvest.

Poultry is another sector that Cargill may wish to prioritise, with its high global growth potential and given that it’s a business unit where the group comes close to the end consumer. A very large low-hanging fruit might be found in Pilgrim’s Pride, the largest chicken processor in the US and no.2 in Mexico, which recently filed for Chapter 11 bankruptcy protection.

Its profitability has collapsed as a result of higher feed costs, that haven’t been passed on to the consumer in the poultry market, with EBITDA falling by 95% to only $ 9 mln in YTD Q3 2008.

At the same time, Pilgrim"s Pride is a giant with $ 7,6 bln turnover in 2007, a five-year sales CAGR of 25%, market leadership in the US, and exports to 80 countries mostly through high –growth foodservice chains. Cargill could acquire it quite cheaply, and leverage the group’s back-integration into feed to restore profitability.

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