As reported by Chain Reaction Research, on September 12, 2017, Bunge (BG) announced it will acquire a 70 percent controlling ownership interest in IOI Corporation’s Loders for USD 946 million, comprising USD 595 million in cash plus EUR 297 million equivalent. IOI will retain a 30 percent ownership interest and customary protective rights. For the next five years, Bunge will the right to purchase the remaining 30 percent interest from Loders Croklaan. Likewise, IOI will have the same right to sell its remaining 30 percent interest to Bunge.
IOI’s CEO Datuk Lee Yeow Chor stated:
“In this respect, IOI will maintain our strong sustainability commitments as spelled out in IOI Group’s Sustainable Palm Oil Policy”.Baupost’s Seth Klarman Suggests That The U.S. Could Be Uninvestable One Day
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“IOI will have two representatives on Loders’ five-member board of directors and our representatives will also be involved in key management decisions taken by Loders”.
Likewise, Bunge confirmed:
“Bunge and Loders are committed to sustainable sourcing, including zero-deforestation, zero peat conversion, protection of human rights, traceability and transparency. This transaction will combine leading policies, people, programs and partnerships from both companies. Bunge intends to continue its work as a member of The Forest Trust, increasing the sustainability of its supply chain and collaborating in projects that help advance industry performance. Following the close of the transaction, Bunge intends to base its palm oil sourcing on Loders’ policy.”
IOI will continue to be the main palm oil supplier to Bunge’s Loders going forward. As shown in Figure 1 (below), IOI has 150,129 hectares (HA) of mature oil palm trees. IOI’s extraction rates are also comparable to their competitors, such as Sime Darby, at 21.35 percent for crude palm oil and 4.81 percent for palm kernel oil.
|Description||Q2 2017||Q1 2017||Q4 2016||Q3 2016||Q2 2016|
|Production ('000 Tons)|
|Crude Palm Oil (CPO)||173.952||138.297||184.598||194.337||152.877|
|Fresh Fruit Bunches (FFB)||799.778||655.274||827.579||872.997||717.484|
|Extraction Rate (%)|
|Crude Palm Oil||21.35%||20.62%||21.77%||21.75%||20.74%|
|Area Planted ('000 Hectares)|
|Total Area Planted||174.866||174.926||175.059||195.433||179.741|
|Total Titled Area Planted||217.917||217.917||217.917||217.917||217.917|
|Yield per Mature Hectare (Tons)|
|Average Selling Price (USD/Ton)|
|Crude Palm Oil||$639||$701||$640||$608||$622|
Figure 1: IOI’s palm oil production statistics. Source: Bloomberg.
J.P. Morgan is the exclusive financial advisor to Bunge. Shearman & Sterling is Bunge’s legal counsel.
According to Bloomberg (paywall), Bunge entered into a USD 900 million, unsecured, delayed draw, three-year term loan agreement with Sumitomo Mitsui Banking Corporation. This loan may be used to pay for the purchase of Loders Croklaan.
Bunge dropped 4.31 percent on the announcement closing September 12, 2017 at USD 71.44.
IOI’s shares traded slightly higher up 1.98 percent closing at RM4.64 with volume at 17.6 million shares traded, 330 percent above average daily volume in 2017. IOI’s shareholders may get a special dividend of about USD 0.03 per share. IOI will use the revenue to expand its upstream operations.
Improving and Integrating Traceability to Plantation Dashboards: Operational Risk
The sustainability risk is that the sales of Loders to Bunge may decrease IOI’s downstream margins. IOI’s margins are high because Loders’ industry-leading specialty fats business includes over 300 patents and other processes the are accretive to margins. IOI will be left with much lower margin palm oil plantation, refining, and oleochemicals, which are price competitive, unlike specialty fats. While the sale cuts IOI’s net debt to 24 percent from 86 percent.
As shown in Figure 1 (above), Loder’s annual revenue of USD 1.6 billion on sales of 1.6 million metric tons of specialty fats implies an average selling price of USD 1,000 per ton compared with IOI’s average crude palm oil selling price of USD 639 means IOI will lose a high margin business from the sale.
The key sustainability concern is IOI will need to invest in processes to maintain its zero-deforestation commitments. But palm oil production is a lower margin business.
Finally, Bunge’s palm oil dashboard updated their zero-deforestation commitment on September 13, 2017. It reported it global traceability to its mills as 92 percent but Bunge also reported its traceability to plantations as only 14 percent. On the other hand, IOI’s dashboard reports it has 100 percent traceability to its mills with 51 percent traceable from plantation to mills.
Given that IOI just sold its high margin business to Bunge, and Bunge and IOI have both committed to maintain their zero-deforestation commitments – which means managing the operational risks of the plantation suppliers - they will both need to secure the funding to integrate their palm oil dashboards, which may be an added short-term cost.