LONDON/WINNIPEG, Manitoba Glencore (GLEN.L), already the world's No. 1 diversified commodities trader, has agreed to buy Canada's largest grain handler in a C$6.1 billion (3.9 billion pounds) deal that will shake up an industry that has thrived on surging global demand for food and fuel.
Glencore will acquire Viterra Inc and then sell off some parts to Canada's Richardson International and Agrium Inc (AGU.TO). By divesting some grain elevators, mills and farm-supply dealers, the Swiss-based trader aims to allay concerns that Ottawa might block the deal on national sovereignty or competition grounds.
Viterra will give Glencore a powerful position in the Canadian market, which will become more open to competition this year with the disbanding of the world's last major marketing monopoly. The company is also big in South Australia, a second grain-growing center.
Cementing Glencore's status as a commodity-trading powerhouse, the deal will give it a huge new presence in grains, an area now dominated by Archer Daniels Midland (ADM.N), Cargill CARG.UL and Bunge (BG.N), complementing its current strength in metals, minerals and oil.
The trader, already in the throes of a $36 billion takeover of miner Xstrata XTA.L, wants to round out its portfolio in anticipation of a coming squeeze on global supplies of grains as the populations of China, India and other emerging economies soar and diets improve.
"Canada as the second leg of the huge North American bread basket is going to be increasingly called upon to produce (crops) for the world," said Rich Feltes, vice-president of research at R.J. O'Brien in Chicago. "What seems to be a lot of money for this investment right now will over the long term, prove to yield handsome returns on the dollar."
The deal, in the works for months, may not be the last to reshape the global farm sector. Gavilon Group, a U.S. energy and grain trader, is also accepting bids for a possible sale, and Glencore's name has come up as a potential bidder.
Indeed, Glencore is already planning to expand its North American ag business, through acquisitions in the United States and organic growth in Canada, said Chris Mahoney, Glencore's head of agricultural products, during a conference call. But he refused to comment on potential interest in Gavilon.
Glencore is offering C$16.25 for each Viterra share, a price that is in line with market expectations after days of speculation. The deal represents a 48 percent premium over Viterra's closing price on March 8, the day before it announced it had received expressions of interest.
The friendly deal, which has the endorsement of Viterra's board, must pass regulator reviews in Canada and Australia. Glencore said it expects no problems.
Shareholders accounting for 16.5 percent of Viterra's stock, including its largest investor, Alberta Investment Management Corp, have pledged their support. The rest will vote on the deal at a special meeting expected in May.
To pay for the deal, Glencore will use existing cash resources and credit facilities, while lightening the burden by selling the majority of Viterra's Canadian assets and some others to closely held Richardson and Agrium for roughly C$2.6 billion in cash.
Agrium will acquire the majority of Viterra's retail agri-products business, including its 34 percent stake in Canadian Fertilizer, for which it will pay C$1.8 billion. Richardson will acquire 23 percent of Viterra's grain-handling assets as well as certain processing assets in North America for C$800 million.
Glencore has been thinking about the deal's three-way structure for about six months, an industry source said. It beat out rival bidders - Archer Daniels Midland (ADM.N) identified itself as one of them - by offering a slightly higher price and more certainty around the regulation process.
OTHERS INTERESTED IN VITERRA
A host of prospective buyers aggressively pursued Viterra for months, said Viterra CEO Mayo Schmidt. A rival bid could still surface, likely a hostile offer, but Schmidt downplayed that possibility.
"It would be my view that the process came to a conclusion with the best buyer of the assets emerging," Schmidt told reporters, adding that Viterra didn't solicit bids.
On Tuesday, Viterra shares dipped 0.4 percent in Toronto, while Agrium stock climbed 2.2 percent with other fertilizer companies. Glencore shares in London slipped 1.6 percent.
Viterra will pay Glencore a C$185 million break fee if it accepts a better offer from another party, or if its board withdraws or modifies its recommendation. Glencore would have to pay Viterra a C$50 million reverse break fee if the deal does not close for regulatory reasons.
NO IMPACT ON XSTRATA DEAL SEEN
Analysts have said the deal is unlikely to disrupt Glencore's blockbuster tie-up with Xstrata - a prize that the commodity trader has worked for years to bring to fruition.
By contrast, Viterra reflects Glencore's willingness to jump at a promising opportunity. The grain handler wants to take advantage of Viterra's prime position to pick up business when the Canadian Wheat Board's monopoly on marketing Western Canadian wheat and barley ends in August.
Glencore's Mahoney said the Viterra deal would have "no impact" on the company's plans for Xstrata.
"Grain trading is a reasonably small part of the (Glencore) business. It's an area where they probably want a larger market share -- and it's one of the areas of their trading business where they can grow," analyst Nik Stanojevic at Brewin Dolphin in London said.
Glencore's bid faces an automatic review by the Canadian government. Any proposed takeover of a large Canadian company by a foreign entity is subject to scrutiny under a law that requires it to carry a "net benefit" to the country. Canada's Competition Bureau will also review the deal.
In 2010, Ottawa blocked a hostile bid by Anglo-American miner BHP Billiton for Potash Corp, the world's largest fertilizer maker, raising concern about whether the government would allow Viterra to fall under foreign control.
But Mahoney said he expected no snags with regulators in either Canada or Australia.
Glencore plans to consolidate Viterra's executive offices in Regina, Saskatchewan, which could sway the support of Saskatchewan Premier Brad Wall, who led opposition to the proposed Potash takeover.
Mahoney also said that Glencore's global marketing and distribution reach would benefit Canadian farmers.
Canadian farmers have said they are mostly concerned about the prospect of less competition resulting from a Viterra takeover, either in grain handling or the sale of crop supplies.
"What you're seeing happen here is further consolidation of the industry," said Saskatchewan farmer Kyle Korneychuk, a former director of the Canadian Wheat Board, speaking on BNN TV. "Farmers will have fewer and fewer choices, and the cost to move product and handling costs will increase."
Helping allay anti-trust concerns, the Canadian grain-handling businesses of Glencore and Richardson would be roughly equal in size after the deal, he said.
Instead concern may focus on Agrium - already the biggest U.S. farm retailer of seed, chemical and fertilizer. It will take over Viterra's leading retail position in Canada.
But involving Canadian companies likely reduces the risk of Canada rejecting Glencore, said BMO Capital Markets analyst Kenneth Zaslow, in a note to clients.
Glencore describes itself as one of the leading exporters of grain from Europe, the former Soviet Union and Australia. It commanded almost 9 percent of the global market for grains at the time of its public share offering last May.
Bank of America Merrill Lynch (BAC.N) and RBC Capital Markets (RY.TO) advised Glencore. Canaccord Genuity advised Viterra, and TD Securities worked for the company's board of directors.
(Reporting by Clara Ferreira-Marques and Victoria Howley in London; and Rod Nickel in Winnipeg, Manitoba; Editing by Frank McGurty)