Part Two
Could you tell us a little about the Viterra acquisition, and how it happened?
It was a complicated transaction and at that time I had little experience in major M&A. Canada and therefore Viterra became a focus for us because the Canadian Wheat Boards monopoly rights were about to be rescinded by the government. We were also already a big trader of wheat, barley and canola and these were key exports from Canada so it was complimentary. We began by looking at the business as a whole, and we identified the businesses that we didn’t want. We presold the fertiliser production and distribution to Agrium and CF Industries. We presold a smaller piece of the fertilizer business and some of the grain handling assets to Richardson. If the transaction hadn’t gone through those sales would have been unwound.
We presold those businesses in part to help with financing the acquisition but also because we either didn’t want them or because we wanted to involve Canadian companies in the transaction. There wasn’t an anti-trust issue, as we didn’t already have a business in Canada, but we had to get approval as a foreign company taking over a strategic Canadian company. Pre-selling parts of the business to Canadian companies helped us enormously in getting Canadian government approval.
We also sold off quite a number of businesses post the acquisition, like the pasta, malt business and the petroleum distribution business; we ended up keeping only about 50% of the company. The enterprise value of the total acquisition was $7.3 billion. At the time it was the biggest acquisition in our space—and still is.
The deal was finalised in Toronto. The Viterra people were in a building and I was in a restaurant with the rest of the deal team just over the road. At one stage there was a long silence and we thought we had lost it to ADM. There was a bit of toing and froing during which I was on the phone with Ivan Glasenberg, Agrium and Richardson deciding whether we should pay more, and how much more. That was one of the beauties of working for Glencore and particularly with Ivan whom I reported to directly. For such a large company there was almost no bureaucracy. You could make big decisions incredibly quickly and easily. It was a huge advantage.
Glencore is somewhat more structured now than it used to be, but to some extent it has to be given the growth of the business post the merger with Xstrata. It is still the same people though. And the company is people. It is only as good as the people that run it.
Why did you keep the Viterra name?
In Canada Viterra had a long history and a well-respected name, appreciated by the farming community, so we had no reason to change it. In Australia, Viterra itself had only bought the business three or four years earlier. Glencore already had a sizable trading business in Australia, headquartered in Melbourne. The Viterra business was headquartered in Adelaide and it was a separate non-trading business providing handling services to third parties as well as to Glencore, so it made some sense to keep the two separate.
Glencore Ltd has transformed itself from a trading company into a mining and trading company. Is Glencore Ag planning any similar transformation, or did the Viterra acquisition already do that?
I think we have largely already done that. Something like 80 percent of our earnings now comes from non-trading. But the asset businesses of Glencore Ag are quite different from the mining businesses of Glencore PLC. Even where we have a dense set of assets such as in Canada—65 country elevators and 5 port facilities—we are buying from the farmer and selling to customers around the world; nothing is entirely back-to-back. So these are asset-based businesses with strong elements of trading running through them. As I said this type of business now constitutes 80 percent of Cargill Ag’s earnings.
You mean Glencore Ags?
(Laughs) Yes, sorry. You know I still sometimes answer the phone “Cargill!”
Trading has become more difficult for reasons that are well known to everyone. This will not change. The transformation to an asset based company, both in Glencore as a whole and Glencore Ag bought Glencore PLC to where it is today with an annual EBITDA of $14-15 billion. This would obviously be quite impossible as a trading company. Already in the early 2000s we could see that pure trading was going to become increasingly challenging.
Other trading houses are moving both ways along the supply chain. Cargill has moved into proteins; ADM and LDC into ingredients. Is Glencore Ag planning to do something similar?
No. I think that is very difficult to do. If you are Cargill and you started to do that forty or fifty years ago, as they did, then that was the right move. They can continue in that same direction. It is a natural progression. For us to transform ourselves now from an upstream procurement, handling, oilseed-crushing company into a company that captures the full value chain—that includes refining, bottling, milling, branding, ingredients, feed—is very difficult.
I say that for a simple reason: we originate about 80 mln tonnes per year and it is much easier to capture those big flows upstream as you are dealing with fewer origins. For example, Russia exports 40 million tonnes of wheat each year through five or six port facilities. Argentina supplies almost 50 percent of the world’s soybean meal through just a few export corridors. You can capture big flows in relatively few countries moving through big facilities. The business is much more fragmented on the consumption end. Egypt, the world’s biggest buyer of wheat, imports ten or eleven million tonnes and there are multiple importers and in turn numerous millers.
One of the mantras that you hear in our business is that you have to capture the full value chain. We can’t possibly do that now. It would cost billions to build downstream businesses of a tonnage that was even remotely relevant to the tonnage that we secure upstream. That is not viable from where we are today. Instead we have to look at improving the core business by deploying capital in the right places.
What do your Canadian shareholders add to your business—and do you think that at some stage Glencore Ag will spin off as a private company?
Glencore Ag is already a separate company owned 50 percent by Glencore and 50 percent by our two Canadian shareholders. They add financial muscle. They are in for the long term. They bring certain insights and observations as an outsider in terms of analytics, finance and a global investment perspective that is valuable.
Are you still looking at mergers and acquisitions?
I still very much believe that the industry requires consolidation through mergers or acquisitions. Moving downstream is not tackling the problem. What I believe we need to do is stick to our core business, focus on developing the broadest geographic footprint to spread the crop and event risk, increase our economies of scale, and take a disciplined approach to organic expansion. The industry is still under pinned by good demand growth and seaborne trade will grow at a faster rate than consumption itself. Technology does not threaten our handling and processing business as it cannot replace the assets themselves.
Where is there over-capacity?
In the north of Brazil…in the US Pacific North West…..in the US Gulf….in the Ukraine…on the east coast of Australia. There was only limited overcapacity in Canada on the west coast but with recent investments in the port of Vancouver there will now be more overcapacity for a number of years.
Not only is there over capacity, but also the existing installed capacity has become a lot more efficient, largely because transport has become more efficient. Trains and trucks are getting bigger, and operators have expanded their terminal input capacity. For example, the railroad in Canada and barge system along the Amazon are increasingly more efficient. Efficiency gains are of course effectively capacity gains.
What is preventing M&A activity in the sector?
A number of things. You would think that pressured margins would encourage acquisitions. The industry has had a difficult two or three years during which potential acquirers have had their own earning issues and were obviously less bold. Things were potentially cheaper but the buyers were more careful. On the other hand, sellers are reluctant because they think the industry is going to get better. It hasn’t yet. Anti-trust and foreign control regulation is also a potential hurdle to some combinations.
Half of Brazil’s cane is used to make ethanol. Do you believe biofuels have a future?
People blow hot and cold on biofuels. Politicians were positive on biofuels 12 years or so ago, and they set up structures to support them: either mandating their use or providing tax advantages, or both. This propelled ethanol production in the US and Brazil, and biodiesel production in Europe.
In 2007/8 and again in 2012, we had periods of high crop prices and people became rightly very concerned about the competition between food and fuel. When you look at the amount of food that gets processed into fuel it clear why this is an issue. We should be very concerned about using food to produce fuel when people don’t have enough food. The other issue is when you look at the carbon footprint of biofuels and consider fertilizer, water and diesel use, you can question whether they are really that good for the environment. That issue hasn’t been completely resolved. This turned the politicians off and the political support was pulled.
However, I think there has been something of a rethink. Food prices have come down and we have surpluses again. When that happens, biofuels can help support prices for farmers. Over 40 percent of US corn production is used for ethanol, and over 50 percent of EU rapeseed is used to produce biodiesel. If you took away that demand, prices would collapse along with farm incomes.
How involved are you in biofuels?
We have three biodiesel plants in the EU. Margins were low for 3-4 years with static demand and production overcapacity. In the past few years no new capacity has been added, and some capacity has been taken out. Demand has increased a little. Meanwhile, the drought last summer put some plants out of action as they couldn’t get their barges up the rivers. At the same time, the EU blocked SME imports from Argentina and, in some circumstances, PME from Asia. Margins have improved considerably and the business has been good for the past year.
Biofuels are a good example of optionality in Ag assets. There is an embedded optionality in Ag assets.
So assets are your biggest asset, so to speak!
An asset base is essential today but in addition to their asset portfolios what distinguishes companies is their people, their culture, the way management and employees interact and treat each other—the respect they show for each other. What kind of a company do you want to make it? In the end any company can hire bright people, but it is the steps it takes to build a motivated, hard-working, entrepreneurial, fast acting team that is important for success. People spend the greatest part of their lives at work; they do not do it only for the money. The Glencore culture is a strength I believe, certainly helped in the early days by private ownership. It is something that must be nurtured to ensure that despite growth it is not lost.
Thank you Chris for your time!
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