Commods groups Louis Dreyfus, Olam in merger talks

SINGAPORE/PARIS (Reuters) - Louis Dreyfus, one of the world's top commodity firms, is in merger talks with smaller rival Olam International (OLAM.SI) in what could extend Dreyfus' global reach and open up its closely held family ownership.

Olam confirmed on Friday it was in talks with Louis Dreyfus Commodities over possible cooperation, with a merger among the options, news that drove Singapore-based Olam's shares up as much as 9.2 percent to a three-year high.

Analysts were cautious on the merits of a fully fledged merger between the two companies' commodities activities, but saw scope for a joint venture and appetite for any share listing by the secretive Louis Dreyfus group.

Louis Dreyfus, whose commodities arm generates some $35 billion in revenue, dominates the flow of agricultural commodities worldwide together with rivals Archer Daniels Midland (ADM.N), Bunge Ltd (BG.N) and Cargill Inc CARG.UL.

The talks between Louis Dreyfus and Olam underscore sector consolidation as global players expand across commodities to take advantage of booming demand driven by a rising world population and fast-growing emerging economies.

"If you have a merger between these two, then they could easily rival the bigger competitors such as Cargill, Bunge or Archer Daniels Midland," said DBS Vickers analyst Ben Santoso. "If there is a merger, they could take advantage of economies of scale and geographical locations. Olam is strong in Africa, Dreyfus is strong in the United States."

The discussions may also reflect a trend for commodities firms to develop an industrial model spanning buying, processing and distribution, said Geneva-based analyst James Dunsterville.

"Many of the historical soft commodities traders are no longer technically traders but industrialists," he said. "I think one that is partly industrial and maybe wants to be more industrial is Louis Dreyfus."

The group is the world's largest cotton and rice trader and ranks in the top three in orange juice, wheat, corn and sugar.

Olam's announcement of its talks came after a report in Les Echos on Thursday that said a merger with Olam was being considered by Louis Dreyfus as one growth option.

Like fellow French daily Le Figaro, Les Echos also said Louis Dreyfus was considering a listing of certain activities. The reports cited legacy issues as one reason for Louis Dreyfus to open up its shareholding, a view shared by analysts.

"There may be people in the family who want to know where the get-out clause is," Dunsterville said.

Former chief executive Robert Louis-Dreyfus died in July 2009 and passed on his majority stake in the group to a special trust, with remaining capital held by other family members.

The diversified group also has businesses including energy storage and distribution and property development.

JV SEEN MORE LIKELY THAN FULL MERGER

Bankers familiar with Olam's workings said while the talks with Louis Dreyfus were at an early stage, the two companies were likely to discuss a joint venture in areas where they overlap.

Andreas Bokkenheuser, a Singapore-based analyst at UBS, said a full merger was unlikely to benefit Olam because Louis Dreyfus was a major trader of cyclical commodities so a combined entity would trade at similar multiples to rival Noble (NOBG.SI).

Olam trades at 22 times 2011 earnings, against Noble Group's 15 times earnings, UBS estimates.

"Olam already commands the largest market share within several of its product lines, so we question whether a merger would render any advantages in the form of increased pricing power and supply chain synergies," Bokkenheuser said.

DREYFUS IPO WOULD BE A DRAW

Olam, a $4.7 billion company which generated S$10.5 billion ($7.9 billion) in revenue in the 2009/10 financial year, said the talks were still at an early stage.

"The company wishes to inform shareholders that it had engaged in preliminary confidential discussions with Louis Dreyfus Commodities in relation to a possible business collaboration which may take the form of, among others, a merger," Olam said in a statement.

The firm, about 14 percent owned by Temasek Holdings TEM.UL, is headed by India-born Sunny Verghese, who last year announced a three-year plan to double net profit margins to above 4 percent and boost intrinsic value three to four times.

Olam also operates rubber and palm oil plantation and plans to expand further into sugar plantations in Indonesia and increase oil palm plantation holdings in Africa.

A source familiar with CEO Verghese said Louis Dreyfus could be looking for professionals to manage emerging markets.

Among recent consolidation deals in commodities markets, Wilmar International (WLIL.SI), the world's No.1 listed palm oil firm, is in the process of acquiring Australia's Sucrogen, from CSR (CSR.AX) for $1.5 billion.

Whether as part of an Olam deal or not, analysts said any share listing by Louis Dreyfus would appeal to investors keen on getting exposure to fast-growing commodities markets.

"If they did a share offering it would create enormous interest," said Pierre Tegner, analyst with Oddo Securities. "There wouldn't be any difficulty in placing the shares."

An offering soon would also allow Dreyfus to benefit from a the latest upswing in food commodity markets, said Richard Crane, a food and agriculture partner at Deloitte.

"There's investor interest in food and it's here to stay in a way that it wasn't five years ago."

($1=1.328 Singapore Dollar)

(Additional reporting by Eveline Danubrata, Saeed Azhar, Naveen Thukral, Lewa Pardomuan and Sarah McFarlane; Editing by Valerie Lee)