That's likely part of the rationale for food conglomerate Bunge's (BG) plan to buy Corn Products International (CPO) in an all-stock deal announced on June 23 and valued at $4.4 billion, or $56 for each share of Corn Products. The purchase price includes the assumption of roughly $414 million of Corn Products' net debt.

At a 31% premium to Corn Products' closing price of 42.90 on June 20, the acquisition isn't cheap, but analysts think it's positive for both companies. Corn Products gains access to a global logistics and distribution network without which the regional company would have had little chance of surviving. For its part, Bunge gets to broaden its business to include refined products such as corn sweeteners and starches that command higher margins. That will extend the company's reach to end users such as manufacturers of beverages, soups, cereals, and crackers.

Bunge Raises Its Outlook News of the deal, which is expected to close in the last three months of this year, sent shares of Corn Products soaring 18.3%, to finish the session at 50.75, while Bunge's stock closed 9.4% lower, at 110.70.

Separately, Bunge raised its earnings outlook for 2008, to $9.35 to $9.65, from a prior range of $7.10 to $7.40 a share, citing better-than-expected results in its agribusiness -- especially oilseeds -- and fertilizer segments, with higher prices driving bigger margins. Wall Street analysts had estimated full-year earnings of $7.70 a share.

It appears that the Corn Products acquisition could be a sign of more consolidation to come, particularly by well-managed companies that know the global business, says Joe Victor, vice-president for marketing at Allendale, a brokerage and commodity research advisory firm in McHenry, Ill.

Having been a dominant force in the global oilseed market, "now is the time for [Bunge] to get more involved with corn starch and sweeteners," given its confidence in a growing population and consumption worldwide, Victor says. "It sure does appear that those who have the strong capital financing behind them do have the power to [buy] some of the weaker companies out there," adds Victor.

For all the opportunities in corn products such as sweeteners and starches, Victor says that higher corn prices are putting a strain on companies that buy corn not only for food and animal feed, but for biofuels such as ethanol.

Indeed, market observers have noted that the possibility of financial strains among smaller ethanol producers may point to even clearer consolidation prospects for Archer Daniels Midland (ADM), which already has a foothold in the ethanol market, says Victor.

Moving from Oilseeds to Corn Just as it did several years ago during a time of distress in the grain elevator sector, ADM would be able to choose which ethanol producers it wants and buy them for 30% on the dollar or less, he adds.

While the diversification in crops and product lines is appealing, and Bunge will be able to increase the products it runs through its existing distribution system, analyst Christine McGlone at Deutsche Bank Securities (DB) warned in a June 23 note that the acquisition will shift the focus of Bunge's agribusiness from oilseeds to corn, which is more difficult in the current environment, where corn is so vulnerable to supply disruptions. [Deutsche Bank does and seeks to do business with companies covered in its research reports.]

The advantage oilseeds have over corn is the wide range of global suppliers, including German and Canadian rapeseed and cottonseed from Malaysia and Indonesia, says Victor. By contrast, corn exports come from only three countries -- the U.S., Brazil, and Argentina -- which makes it harder to fill the gap created by an event like the recent Midwest floods.

But Bunge has done a good job of managing its corn business, and the contracted fixed price part of the total portfolio for the combined company should represent less than 5% of sales, McGlone said in her note.

Bunge said it expects the acquisition to lower costs and boost its profits by an estimated $100 million to $120 million per year, with savings to come from areas such as procurement, logistics, and eliminating duplicate costs. David Driscoll, an analyst at Citi Investment Research (C), said there's not much likelihood that other companies will bid for Corn Products, though "wild cards would be Tate & Lyle (TATE.L) and one of the Asian agricultural processors such as Wilmar."

But Driscoll said he doubts the deal will produce any cost savings in the first year and sees the additional shares going to Corn Products shareholders lowering Bunge's 2009 earnings by 15% to 16% a share, assuming a conversion ratio of 0.4628 shares of Bunge for one share of Corn Products and a profit of $260 million coming from Corn Products' operations next year. He has a hold rating on Bunge and a buy rating on Corn Products. [Citigroup Global Markets has done noninvestment banking business with Bunge and Corn Products within the past year.]

Stronger Balance Sheet a Benefit Bunge could issue a smaller number of shares if its stock rises as high as 133.10, the maximum price that would still entitle it to the lowest conversion ratio of 0.4207 Bunge shares for each share of Corn Products, Driscoll said.

Another major plus for Bunge will be a stronger balance sheet, given Corn Products' track record as a stable cash-flow generator, with $258 million in operating cash flow in 2007, Credit Suisse (CS) analyst Robert Moskow wrote in a research note on June 23. Bunge had negative cash flow of $411 million last year, while its debt of nearly $5 million is much larger than the $414 million in debt held by Corn Products, he said. [Credit Suisse does and seeks to do business with the companies covered in its reports and is advising Bunge on the acquisition.]

Standard & Poor's Equity Research downgraded Corn Products' stock to hold from buy on June 23, ahead of the announcement of deal, and reaffirmed the new rating after the news, citing valuation with the shares trading close to the acquisition agreement price. [S&P, like BusinessWeek, is a unit of The McGraw-Hill Companies (MHP).]

Story Source: Business Week