Glencore’s (LSE: GLEN) managers have to be commended for how hard they’ve worked over the past two years. This time two years ago, City analysts were starting to raise concerns about the company’s debt levels and its ability to appease creditors as commodity prices plunged.
Despite management’s attempts to convince the City that Glencore wasn’t about to collapse, investors rushed for the exits, and the shares fell to a low of 73p at the beginning of 2016. However, over the next 12 months, the company proved that its drastic action to shore up the balance sheet had worked extremely well and the shares surged by nearly 400% from the lows.
Now, having convinced all stakeholders that the business is back on a stable footing, management is back on the hunt for acquisitions, and grain trader Bunge Ltd seems to have captured the firm’s attention.
A reasonable deal?
Bunge is a grain and oilseed merchant and processor, and the business would fit well into Glencore’s existing agricultural division, which was founded last year after the firm received substantial investments from two Canadian pension funds. It looks as if the company is seeking to grow this business and expand into new markets, just as it did with oil before 2015’s crisis.
It is widely expected that Glencore will have to offer more than $90 per share for Bunge, giving the company a market value of around $13bn. Such a premium may be justifiable. Around 50% of Bunge’s gross profits is spent on selling and general administration costs, which would be a great place to start the cost-cutting if Glencore were to make a final offer for the group. What’s more, Glencore is one of the world’s largest commodities traders, and it is almost certain that the company would use existing connections to help increase margins on trading — connections not currently available Bunge.
Plenty of potential
Bunge’s management has previously laid out a long-term plan for achieving earnings per share between $8 and $8.50. Analysts widely believe that this target is unlikely unless the company can dramatically increase its profit margins, something that would be much easier when combined with Glencore.
Assuming Glencore can extract enough synergies from the business to achieve this target, the enlarged group would be able to pocket an additional $1.2bn per annum in profit.
Back to 500p?
Buying Bunge may put a rocket under Glencore’s earnings and send the company’s shares back to their offer price of 500p. City analysts are expecting the company to report a pre-tax profit of £5.4bn for 2017 and earnings per share of 26.6p. For the year after, analysts have pencilled-in earnings per share of 24.5p, but this could be revised significantly higher if Glencore pounces on Bunge.
Such a deal would not only see Glencore’s shares head higher thanks to positive earnings revisions, but it would also signal that the company has returned to full health. This might see its valuation move back to its pre-2015 average of around 22. Even without a contribution from Bunge, on projected earnings per share of 24.5p for 2018, a valuation of 22 times forward earnings would see the shares trade back up to 539p.