Analysts weigh in on Tate & Lyle as takeover target

by Eric Schroeder
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VANCOUVER, B.C. — Could Tate & Lyle be a takeover target for Bunge Ltd.? According to analysts with Canaccord Genuity, a potential bid from Bunge is now “substantially greater” given Tate & Lyle’s “lowered valuation, a strong U.S. dollar, low interest rates, a good strategic fit and shareholder dissatisfaction with Tate.”

In a research note e-mailed to clients on Feb. 16, Canaccord Genuity analysts Alicia Forry and Eddy Hargreaves said Tate & Lyle would provide greater exposure to value-added ingredients and expand Bunge’s presence in corn milling, an area of long-term interest to the company.

Ms. Forry and Mr. Hargreaves said they have seen a shift since Soren Schroder took over as chief executive officer of Bunge in June 2013, a shift that has put Bunge more in line with Tate & Lyle. Additionally, Bunge has stated that its priorities for investment will be in the global oilseeds and grain milling and processing chains.

“We think Tate & Lyle would be an attractive inorganic growth option for Bunge as the latter seeks to diversify into more downstream products,” the analysts said. “Tate has strong existing relationships with food and beverage customers, and a world class Innovation Centre just outside Chicago. Bunge management aims to increase the group’s ROIC from 8.5% currently to 10% by 2017 (with at least 9% in the Agribusiness and Food & Ingredients divisions combined). Tate’s ROIC has averaged 13.6% over the last two years (stripping out the j.v. profits, which are not consolidated) and in spite of the significant decline in profit in the current year we still forecast a ROIC of just over 9%, in line with Bunge’s medium-term target.”

The analysts also noted Bunge has bid for a similar company before, having tried to buy Ingredion (then known as Corn Products International) for $4.8 billion in an all-stock transaction in 2008. Ingredion pulled out of the deal after corn prices plummeted and Bunge’s shares spiraled downward. And while Ms. Forry and Mr. Hargreaves said Ingredion may still be the superior target for Bunge compared to Tate & Lyle given the broader footprint of milling assets, they pointed out Tate & Lyle would be the cheaper option (Ingredion’s current enterprise value is $7 billion, compared to $5 billion for Tate & Lyle).

“Tate & Lyle would bring to Bunge 16 corn processing facilities, an oat processing facility, 10 ingredients production and blending sites and 15 R.&D. sites,” the analysts said. “We believe Bunge would be particularly interested in the corn wet mills, since corn milling was only 20% of its overall milling revenues in 2013 (and this ratio is not likely to have increased significantly in 2014), and the Ingredients blending and R.&D. facilities, which would expand its presence in downstream products.

“In addition to the physical plants and R.&D. facilities, Tate has sales offices around the world, including in Chile, the Middle East, Australia and China, to name but a few. Given Bunge’s broad global presence there could be significant cost synergies from consolidating these sales offices with Bunge’s existing ones.”

Canaccord Genuity moved its recommendation on Tate & Lyle from sell to buy and raised its target price to 650p from 530p. The analysts also modelled an acquisition of Tate & Lyle by Bunge at 781p a share, a 40% premium to the current share price.
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