Chemicals & Materials

Rumor Mill: Bunge Considers Acquistion of Corn Products International Again

by Christopher Shanahan 28 Jan 2010
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Well, it may be back on. Bunge Ltd. stated on January 27, 2010 that the company is interested in reviving its bid for Corn Products International (CPI) as indicated by its CEO during its quarterly earnings call. As I had stated in June of 2008, Bunge, the world's third largest agribusiness with total sales of nearly $53.0 billion in 2008, announced that it had interest in acquiring Corn Products International (CPI) for $4.4 billion in stock. It is apparent that Bunge’s strategic objective is to move away from the volatile commodity markets and forward-integrate into specialty markets that offer more certain returns and higher marketing margins. This is shown by its recent actions of selling off its Brazilian fertilizer assets to Vale (for cash), its increase interest in finished food products, and its persistence in acquiring CPI, a major corn milling and sweetener producer.

Bunge's main competitors, Cargill Inc (Cargill) and Archer Daniels Midland Company (ADM), are both dominant participants in the U.S. corn milling and sweetener industries and are larger firms than Bunge. With the integration of CPI into its business, Bunge could move the company closer to being the second largest agribusiness in the world and make Bunge the third largest corn syrup supplier in the United States. Bunge's possible move into the U.S. sweeteners market is expected to influence the company's top-line growth and contribution margins. The U.S sweetener industry, valued at over $8.0 billion dollars in 2009, is experiencing relative high growth in excess of 5.0 percent per year mainly due to increasing demand for corn-based sweeteners.

Bunge was not able to close the CPI deal in November of 2008 because of the onset of the economic recession substantially reduced the value of Bunge’s stock offer. Specifically, Bunge offered CPI $4.4 billion in stock in June 2008 which ended up being $1.6 Billion in value in November 2008.

Ouch. Now that Bunge has a chest of cash on hand, the new offer is highly likely to be a cash offering, or mostly cash.

Though CPI is not the only business that Bunge could go after. Akzo Nobel NV’s National Starch unit would be a good second best fit for Bunge. Though not as likely, watch out for that possible move if the CPI venture fails again.

As I had stated in a prior article, the decision to acquire one company by another, usually larger, company primarily occurs in order to gain a larger share of the market or enter into new market segments. The primary advantage Bunge enjoys is that it is able to quickly expand its corn sweetener business without incurring the costs of starting from scratch with new production plants. In addition, the blending of Bunge's and CPI's distribution chains will increase each company's penetration into markets outside of their historic base. For example, Bunge will now be able to compete effectively in the lucrative North American corn syrup market and directly supply large major food processors such as Kellogg Co and Coca-Cola. Moreover, of course, the savings in transportation costs due to blending distribution channels is expected to be in excess of $100 million.

The disadvantages of a possible Bunge/CPI merger is more likely to be directly felt by companies within the corn milling and sweetener industries. Specifically, the acquisition will be a major challenge for smaller, niche companies that cannot compete with the likely lower prices the larger company will be able to offer due to increased economies of scale and industry concentration. In addition, the trend of increasing merger and acquisition activities is self-driving and is expected to increase in the future, especially in light of the recent food price hikes that are increasing the likelihood of smaller industry participants exiting the markets, or being bought out by their larger competitors. Given these challenges, the possibility of Bunge's acquiring CPI is expected to be beneficial for both parties.

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