CPI has ‘myopic vision’ over Bunge merger

The $4.8bn deal, announced in June, was expected to move Bunge closer to becoming the second largest agribusiness in the world, whilst expanding Corn Products International’s (CPI) product portfolio.

However, it was thrown into turmoil this week when CPI’s Board of Directors notified Bunge of its intent to withdraw its recommendation in favor of adopting the previously announced merger agreement, and instead recommend against it.

Christopher Shanahan, research analyst, Global Chemicals, Materials and Food, at Frost & Sullivan, has been following the planned merger and was somewhat surprised by CPI’s recommendation.

He told FoodNavigator-USA.com that Bunge was more exposed to commodity markets than CPI and the last three months had been particularly volatile. Meanwhile, CPI had seen strong growth in the last nine months.

Shanahan said: “It looks like CPI's potential cost savings and gains from the merger (lower transport costs and a more complex dynamic supply chain) relative to the increased market risk to its shareholders has diminished and has thus stimulated the decision to not adopt the merger recommendation with Bunge. ​

“This change in heart may be a knee jerk reaction to the current state of affairs and even myopic. ​

“However, given CPI's strong performance in the last couple of years, it also appears that CPI is doing fine by itself.”​

The analyst said that the advantage for Bunge was expansion into the corn sweetener business without incurring the costs of creating a new start-up company from scratch. This would put it on par with Cargill and ADM, the largest agribusinesses in the world.

Also, blending Bunge and CPI's distribution chains would increase each company's penetration into markets outside of their historic base. For example, Bunge would be able to effectively compete in the lucrative North American corn syrup market and directly supply large major food processors such as Kellogg Co.

The savings in transportation costs alone due to combining distribution channels was expected to be in excess of $100 million.

However, Shanahan said that while this was an advantage for​Bunge, it could be a disadvantage for CPI's shareholders.

He added: “Not only are commodity prices down, but demand for Bunge's products are down, thus putting pressure of Bunge's ability to sustain its margins.”​

Meanwhile CPI has seen continued growth in its earnings per share (74 percent), net income (72 percent), and net sales (24 percent), due to its strong price/product mix strategy, relative to this time last year.

Disappointment ​

Following the notification by CPI’s board, Bunge said it was disappointed and its options were “either terminating the agreement or proceeding to shareholder votes under the existing agreement”.​

If CPI withdraws or changes its recommendation of the merger, Bunge has the right to require CPI to hold a meeting of its stockholders to vote on the adoption of the merger agreement or to terminate the merger agreement.

Bunge could then seek reimbursement from CPI for up to $10m of expenses related to the merger.