By Joseph Hogue CFA
Bunge Limited (BG) recently announced that it would sell its operations in Brazil to Yara International for $750 million. The sale represents a significant change in plans for the White Plains, New York company that had previously announced large-scale investments in South America’s largest economy.
The $10.5 billion agribusiness player booked $2.65 billion in revenue and $77 million in earnings before interest, taxes, depreciation and amortization (EBITDA) from its 22 blending units in Brazil for 2011. The world’s second-largest oilseed producer will keep its port terminal in Santos and has signed a long-term fertilizer supply agreement with Yara to ensure supply of materials.
The sale is a 180-degree turn for the company and its plans for Brazilian investment. Just last June, Bunge announced another $584 million in investments through 2016, on top of almost a $1.5 billion already invested or planned for the country. A hard drought over the last year sent the agricultural sector reeling, with sugar exports down dramatically and some fearing the need to import soybeans for the first time in more than a decade.
The sale may be attributed more to Yara making a good offer for the assets rather than the need for Bunge to exit the market. Yara has said that synergies of at least $25 million annually are possible from the deal, and will help the company meet its 33% production growth goal to 2014.
Bunge sells grains and fertilizers to growers, then processes and sells oil products to consumers. Sugar and bio-energy account for approximately 10% of sales. Agricultural commodities are 66% and food oils account for about 15%.
Shares have reversed first-half weakness this year to outperform competitors like Archer Daniels Midland (ADM) and the commodity index PowerShares DB Agriculture Fund (DBA). Shares are up almost 25% since June, but are still attractively priced at 12 times trailing earnings versus an average of 13 times for the industry. The company has a gross margin of 4.5%, less than 85% of peers in the industry, but an operating margin of 1.7%, around average for the group.