Industry Experts Look At What Might Follow Bunge-Viterra Merger
By Richard Kamchen
Western Canada’s grain handling sector is no stranger to a changing landscape, so even the scale of Bunge’s takeover of Viterra wasn’t quite earthshaking-level news. But it has left some wondering if there’s more consolidation to come.
In June, Bunge announced its merger with Viterra, which it expects to close in mid-2024.
The merger would make Bunge the second-largest agribusiness company in the world based on sales, notes S&P Global analyst Chris Johnson.
S&P Global Ratings upgraded Bunge to 'BBB+' from 'BBB' following the news, and held out the possibility of an upgrade to the 'A-' when it’s confident the acquisition will close as currently agreed and related regulatory hurdles have been cleared.
Meanwhile, another American credit rating agency, Fitch Ratings, placed all of Bunge’s ratings on Rating Watch Positive (RWP).
After the merger is completed, the combined entity’s business profile will be more comparable with those of Cargill and Archer-Daniels-Midland, Fitch reported. These three represent the A, B, and C of the ABCD quartet of giants that control over 70 per cent of the global grain trade. The fourth is Louis Dreyfus.
More consolidation to come
Fitch rating analyst John Chu says he wouldn’t be surprised to see more consolidation happening in the near- and long-term.
“I do see consolidation continue to be a theme, not just for the agriculture scene, but pretty well most sectors out there.”
James Nolan, a professor at the University of Saskatchewan’s department of Agricultural and Resource Economics, says he wasn’t surprised by Bunge’s merger as he’d believed more consolidation in the grain handling sector was only a matter of time.
“It is hard to tell whether more dominoes will fall, but this is often the case as CEOs jockey for position and don’t want to be left behind,” Nolan says.
“And there are growing economies of scale in grain handling, so I can see there being two to three major grain handlers in Western Canada when it all settles.”
The danger from the grower’s point of view is less buying competition for their grains.
“The potential always exists for market power to be exerted once you get down to just a handful of firms,” Nolan says.
Murray Fulton, a professor emeritus at the Johnson Shoyama Graduate School of Public Policy at the University of Saskatchewan, says there could be further consolidation ahead, but not necessarily driven by the Bunge-Viterra merger.
“I expect the grain firms are facing considerable uncertainty about how the grain market will operate in the future given the war in Ukraine, and the talk of friend-shoring among countries in what I might call the ‘democratic regime’ orbit,” says Fulton. “One of the responses to this increased uncertainty may well be to consolidate, since larger firms are better able to hedge their bets.”
How it plays out is anybody’s guess.
“A lot will depend on key individuals and their beliefs in how the world will unfold,” Fulton says.
Jim Smolik, a stakeholder relations person with the Western Canadian Wheat Growers Association, says all companies are continually looking at how they can best compete, not only for farmers’ grain, but also into world markets.
“The grain business is no different than any business that will continually strive to stay competitive,” Smolik says. “Each company will of course have different strategic directions, and while some look to specialize in a specific area of sourcing and handling grain, others may see further integration between the unprocessed grain and the consumer.”
One scenario Chu envisages is smaller players consolidating together to better compete with their larger competitors.
Fulton also thinks the likeliest scenarios will involve the smaller players, either with some of them combining, or with some of them being swallowed up into the larger multi-nationals.
“I think the smaller firms will find it increasingly difficult to deal with the increased uncertainty we are seeing,” Fulton says.
Smolik adds that smaller players’ competitiveness is challenged when their competitors grow larger. But that’s not something limited only to grain handling.
“As an example, grain farms continue to get bigger and bigger as economies of scale have become very important in a highly competitive industry,” Smolik says. “The sheer price of doing business becomes progressively harder if you are a small player as the industry evolves to accommodate the larger players.”
Nevertheless, it’s not automatically smaller firms that are the likeliest to come under the most pressure to consolidate. Generally, companies with the weakest balance sheets are always the most vulnerable, and that may not be related to the size of a company, Smolik says.
“A smaller company with little debt may be in a better position than a larger company that has a high debt load to service,” he says.
Smolik adds that the question then maybe switches to opportunity.
“If a company can’t see a way to grow or to remain competitive, it may be an opportunity to merge or be bought out,” he says.
Chu stresses smaller firms can endure, but it might depend on focusing on a niche, like buying only certain commodities, or servicing a small pocket or region.
“From that perspective, I think they can easily do well in the current environment and even in a more consolidated environment, as long as they’re focused on their niche,” Chu says. “They don’t have to be big, but having said that, there is a reason why you’re seeing more consolidation – because there are economies of scale to be had.”
Chu also says he isn’t anticipating any further consolidation from massive companies.
“Not sure if we’re going to see any of the really bellwether names consolidating together because there are regulatory approvals that are going to need to take place across various jurisdictions around the world, and because they are so big in terms of geographically diversified, you might have to see some pretty significant divestiture of assets to appease the regulators that may not be worth it for the blue-chip players.”
Fulton holds similar sentiments.
“While it is not impossible to think about one of the large players selling to another large player, I expect such outcomes would be highly scrutinized by the Competition Bureau, which currently appears to be leerier of the benefits of mergers, and may in fact be blocked,” Fulton says.
Potential divestiture is an interesting part of the Bunge-Viterra merger, according to Smolik, particularly how the Competition Bureau comes to view Bunge’s part ownership of the G3 agribusiness.
“Depending on the bureau’s investigation and how they determine the market share in locations will drive decisions, (they’ll decide) if they need to divest facilities or even possibly the ownership percentage in G3,” says Smolik.
Just as the country elevator draw area and competition will be looked at, so too will port positions, he adds.
“Currently the grain terminal in Prince Rupert is a conglomerate of three grain companies, and similarly the Port of Vancouver has terminals that have individual and joint ownerships. So this all has to be taken into account by the bureau.” BF