Confectioners sweet on ADM's decision to keep cocoa business
NEW YORK (Reuters) - Easter came early for the global chocolate makers this year.
Just days before one of the busiest holidays for chocolate sales, Archer Daniels Midland Co (ADM.N) on Tuesday ditched long-running efforts to sell its niche cocoa business, easing concerns that have weighted on the market for months about a possible tie-up with ADM's closest rival.
Minneapolis-based Cargill had been in late-stage talks to buy the business, which spans bean pressing in Abidjan in Ivory Coast to fine chocolate making in Belgium. The combined company would have been big enough to rival Swiss chocolate maker Barry Callebaut, the world's largest industrial chocolate producer.
In the close-knit industry dominated by a handful of players, news that the ADM-Cargill deal was off the table brought relief to dealers, grinders and confectioners who had worried about erosion of their bargaining power.
"A lot of people in the industry were concerned about the merger. A large merger the size of ADM/Cargill was going to have a significant impact (on) the market," said Julio Sera, senior risk management consultant for INTL FCStone in Miami.
The combination would have created a cocoa powerhouse to challenge Barry Callebaut, and put at least half the global 4-million-tonne market in the hands of two players.
In a short statement, ADM said it will now look to divest only its chocolate operations, a smaller business with six plants in Europe and North America. It plans to retain the bean processing business, maker of its premium-fetching "deZaan" cocoa powder brand.
For ADM, the move marks a refocus on a business that makes cocoa butter and powder used in chocolate that has been one of the industry's largest for almost two decades, competing with Barry Callebaut, Cargill and other big cocoa traders Olam International Ltd (OLAM.SI) and Ecom Agroindustrial Corp.
For players along the supply chain, the dust in the volatile, competitive industry has settled for now.
COST-CUTTING PAYS OFF
In announcing its about-face on Tuesday, ADM said extensive negotiations with a potential buyer did not reach an "outcome that met ADM's objectives," but it did not name any suitors.
Industry sources say that as cocoa prices have recovered from multi-year lows last summer, ADM may have haggled over the value of the business, estimated last summer to be worth $2 billion.
Potential antitrust issues also likely played a big role in talks too. The firms' bean processing operations in Europe would have drawn regulatory scrutiny, legal experts had said.
The region is by far the biggest for grinding beans used to make butter and powder that go into chocolate bars and cookies.
Removing one of the biggest players could have forced Cargill to sell some assets to placate regulators, market participants said.
Confectioners like Hershey Co (HSY.N) and Mars may have been big enough players in their own right to protect themselves from any undue influence over prices, but small- and medium-sized buyers would have struggled to maintain market share.
In shifting its strategy, ADM must now find a buyer for the chocolate business, at a critical time for the downstream industry.
Its cocoa processing has returned to profit after a cost-cutting drive and helped in part by a surge in butter prices, traders said. But the smaller chocolate business in an even more competitive market is underperforming, the spokeswoman said.
Some source suggested Cargill may be interested in the chocolate business.
"I think it's a sign of the times," said Philippe de Laperouse, director of HighQuest Partners' global food and agribusiness practice. "People are focusing on what they do best and trying to pare it down."
(This version corrects 17th paragraph to show chocolate business is underperforming, not lossmaking)
(Editing by Josephine Mason and David Gregorio)
- Tweet this
- Share this
- Digg this
DAVOS, Switzerland - Central banks have done their best to rescue the world economy by printing money and politicians must now act fast to enact structural reforms and pro-investment policies to boost growth, central bankers said on Saturday.