207 (31.01.19)


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EXCLUSIVE

Glasenberg’s Pasta Business

An accounting shift inside Glencore has repositioned the group for deals, according to bankers involved, shooting billions of dollars of chickpeas and lentils through its head office in Switzerland

In 2012, South African coal trader Ivan Glasenberg came into a new business. Seen as one of the most aggressive dealmakers on the planet, Glasenberg is the biggest investor in commodity giant Glencore, which had just paid $6bn of Viterra, a Canadian grain trader that in turn owned Dakota Growers, an industrial food company in America's Midwest.
While Glasenberg is known for deals in coal and crude oil in Australia, Russia and Kazakhstan, Dakota Growers makes rainbow-coloured gnocchi and bow-tie pasta twirls. Glencore's M&A team quickly dispatched the business, the third-largest pasta maker in the US. “No lasagna sheets,” one Glencore spokesman says. But the deal points to a shift in its thinking.
Other mining companies also have sidelines in food: Anglo American recently launched a small panettone producer in Peru, whilst Barrick Gold owns a pig farm in Africa. But Glencore is unique in the mining industry in buying a widening range of groceries, from bottled olive oil in Spain to croissant ovens in Switzerland at a cafe called Fontana, owned by Glencore's parent company, where bankers advising the group say they are often left waiting.
Spanish olive oil is better than Italy's, insists Glencore's head of risk Carlos Perezagua over a bowl of dairy milk and granola. “Italians are just better at marketing.” Glencore is trying to square that circle: in a skyscraper in Madrid the group is running an olive oil trading desk.
None of its food brands show up in its annual report. Their revenue is too small. But that could change.
In a shift in accounting policies at the end of last year, Glencore de-consolidated its agricultural division. Having sold a 50 per cent stake in the unit to two Canadian pension funds, Glencore has unpicked the balance sheets: wheat silos and debt linked to its grain trading business, known as Glencore Agri, will no longer show up on

the books. It is “fully independent”, finance director Steven Kalmin says.
That creates a standalone entity, well positioned for deals. Glasenberg has used the same structure before: in 2002, he helped put together Xstrata, an arms-length sister company that spent $35bn on 40 acquisitions over the next decade in chrome, copper and coal, before being re-subsumed by Glencore in a $46bn deal.
Repeating the tactic in wheat and barley would again let outside investors carry the risk of big-ticket deals, whilst keeping debt-heavy assets, including grain trains and ports, away from the group’s leveraged trading business.
Bulking-up on agriculture could be a sharp move. After several bumper harvests, grain prices are languishing and margins are low: corn bought in Nebraska for $167 per tonne might be sold in Japan for $173, down from $300 in 2012. But food security is so sensitive, markets quickly turn skittish and are prone to spikes and embargoes.
Food meanwhile moves on a different cycle to Glencore's other commodities. Sources point to the instant noodle market: 1,000 packets are opened in China every second, but sales are inversely correlated to China's economy. As incomes rise, and as Beijing pumps capital into high-speed railway lines, citizens spend less time buying snacks on train station platforms: noodles dip when copper imports rise.
Another valuable trade is China’s beer market. At 46 billion litres it is five times bigger than Germany’s and is fed by 6m tonnes of barley shipped in from Australia, worth $1.3bn. Glencore has a large position in the market. Its grain division, valued at $6.3bn, is led by Chris Mahoney, an Olympic rower who won silver in Moscow in 1980. Four decades later and he has hundreds of thousands of tonnes of sugar bagged-up in warehouses outside the city.
Acquisitive and single-minded, Mahoney is determined to break into the top three of

the grain trading world, dominated by companies in business since the 1850s.
The largest player is Cargill, America's biggest private company, which describes grain trading as simply moving food to wherever it is needed. In the case of its poultry business, that means shipping 18 million eggs a year from its battery farms in Thailand to McDonald's in the US. Owned by one family, Cargill is run out of a private mansion in America's grain belt.
There is also Louis Dreyfus, controlled by a Russian businesswomen living in Switzerland, who has recently been selling assets in juice, fertiliser, metal and milk.
That leaves biofuels giant Archer Daniels and New York-based Bunge, dominant in the soybean market. Either company could slot into Glencore's portfolio: Mahoney is heavy on wheat and barley but light on corn and soybeans in Brazil and the US.
A fallback option is to continue piling-up assets piecemeal. Brazil's new president, in Switzerland last week, is currently working on plans to privatise the country's state-owned agricultural assets.
Glencore's insiders say it intends to stop short of a “field-to-fork” strategy. Happy to ship wheat for McVitie's, it has no plans to start baking biscuits. But after a year of high-level corruption probes into its copper and cobalt division, a blockbuster deal in grain could refocus the market on Glencore's $9bn of free cash flow.
Glasenberg has sold his pasta business and is reticent in committing to further deals. But his brief foray down the food aisle might have further to run. “We wait and see where opportunities exist.”

CORRECTION: Glencore’s grain division has not made a formal approach to trader Louis Dreyfus


 

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