Jun 16, 2009

An Agriculture Juggernaut Is Born


VIterra, a successful Canadian agriculture company involved in grains (marketing/shipping, handling/pooling and exporting grains in addition to other segments in the agribusiness field (manufacturer and distributor of fertilizer) made a successful Bid to the Australian King of Grain, ABB Grain of Australia. Soon After the divesture of the government monopoly (Australian wheat board) ABB grain quickly snatched up 55-60% of the total market share, the rest being made up of numerous small players. ABB does more or less the same thing in addition to providing rural services to suppliers, supply chain, wheat/grain collecting/shipping/manufacturing and a few other small segments.

Wheat is a commodity that often goes overlooked and assumed to be very plentiful worldwide. The last decade’s production vs. consumption numbers, however, paints a much different picture. The Gap between production and consumptions has be slowly but steadily narrowing, due to the fact that even though production has picked up a bit recently, consumption has been growing at a much fast pace. It is very y likely and almost a guarantee wheat prices will break through last year’s high, which are substantially higher than in the current environment. This is likely due to population growth in emerging countries coupled with a globally increased standard of living.

This merger has vast implications for this newly formed company which I presume will be called ABB grain. Perhaps the most important effect will be a reduction in risk (in terms of weather destroying harvests) as grain will come from Australian as well as Canada. Additionally, this will provide cost cutting measures due to the fact Viterra ships to Japan, therefore a reduced workforce and less or smaller port terminal will increase operating efficiency. Ass ABB ships to parts of Europe, China and the Middle East, this new entity will have a further global reach. This may also have indirect effects for new contracts as a larger, grain company with operations globally, providing a lesser perceived risk from cliental.

Additional synergies will include sales growth, which may be augmented by the ability to reinvest more heavily thus increasing the estimated 16-18% growth to 20%+. Growth can also be more easily attainable with a better capitalized company, in order to augment acquisitive growth with organic growth. Lastly, Instead of buying futures, which most people don’t have the first clue about, ABB Grain will essentially be a levered play on Wheat.

From a valuation Perspective, I used sum-of-the-parts. ABB Grain, conservatively speaking was intrinsically worth $14-$18/share(depending on the price of wheat). So assuming we take the midpoint, ABB adds $6.50 To Viterra's Valuation (16-9.5). Viterra was and still is trading well below the intrinsic value as hit is down nearly 60% from the drop in wheat price and overall market negativity. Viterra's value ex-ABB is worth somewhere in the neighborhood of $14-$17/share. This equates to a fair value of $22/share + a minimum of $6-$8 dollars of synegies from growth and cost cutting (margin expansion). So In my estimation in a year or two from now, when the integration is operating at 100 efficiency, ABB Viterra should be trading between $23-$28/share.

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