Why a Bunge-ADM Merger Seems to Make Sense

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In a world where many mergers are facing regulatory hurdles for approval, it’s still amazing to see the potentiality of a $10 billion or more merger. A report was made late last week that Bunge Ltd. (NYSE: BG) was the subject of a potential takeover by Archer Daniels Midland Co. (NYSE: ADM). While Bunge shares have rallied more than 15% on the news, ADM shares have risen too.

Quite frequently, shares of an acquirer go down when it announces plans to acquire a company. After all, it can be dilutive to earnings, it can increase debt, it can complicate an operating structure and there is always a chance for serious integration risks.

Mining giant Glencore confirmed in the middle of last year that it had approached Bunge regarding a potential merger.

Regardless of how realistic the news might be for two agricultural leaders, a new $30 billion or more company could emerge. Several outside reports have talked up the combination, and that may make it hard for these companies to not try to unite.

A firm called Vertical Group, which tracks many deals in agriculture, sees big upside from potential synergies. That would be on the cost side and on the revenue side of the equation. It could even allow for the combined company to address an overcapacity that has been in place in the grain processing and trading areas. ADM could also gain more pricing power with food and livestock companies. The Vertical Group team believes that Bunge could be worth $100 or more in a merger with ADM.

Credit Suisse already rated Bunge as Outperform, and it thinks the deal may be more than mere friendly fire. The firm’s view is that an ADM-Bunge merger would make strategic sense for ADM. It feels that the news of the deal being made public might be ADM trying to get Bunge to the negotiating table. Why this matters in the Credit Suisse report is that Bunge and Glencore have a standstill agreement that is set to expire in February.

Stifel believes that ADM could afford to pay $96 per share (or higher) as a positive catalyst when its grain trading and processing operations continue to struggle. Bunge could also join ADM’s global group of facilities, port terminals and processing plants.

Citigroup previously said that Bunge was valued at $94 per share, prior to lowering its target price to $88 last July after reports that Glencore was interested in acquiring Bunge.

CFRA (S&P) still rates ADM with as a Hold with a $43 price target, and it rates Bunge at Hold with a $75 target price.

ADM shares were up another 3.2% at $42.25 on Monday afternoon, versus close to $40.60 last Friday before the news broke. ADM’s market cap is now $23.65 billion, and its 52-week trading range is $38.59 to $47.44. Its shares are also about $1.50 above their consensus analyst target price from Thomson Reuters

Bunge shares were up 4.1% at $80.75 on Monday afternoon. Its market cap is $11.35 billion, and the 52-week range is $63.87 to $83.75. The prior consensus target price for Bunge was roughly $80.70 coming into the news.