No corner of grain-based foods or agribusiness has gone untouched by acquisitions and mergers in recent years. Yet when measured against the many history-making business combinations that have been completed, the Bunge Ltd. acquisition of Cereol S.A. stands out as extraordinary, according to Alberto Weisser, Bunge chairman and chief executive officer.In addition to the complementary product lines and the striking geographic alignment of the two companies’ worldwide assets, Weisser said the oilseed processing industry is one in which it is uniquely beneficial for a company to hold the leading global position as Bunge now does. The acquisition of Cereol has made Bunge the largest oilseed processor in the world with major operations in North America, South America and all across Europe. Even as the company maintains a strong position in wheat and maize milling, the Cereol acquisition has underscored Bunge’s primary focus on soy processing.
According to Weisser, soybeans offer a global processing company something that maize and wheat do not — a consistent opportunity for significant growth. While world trade and use of wheat and coarse grains have been edging up only modestly from year to year (wheat trade actually has been stagnant), world soybean demand has grown at a compound annual rate of 4.5%. "It is expected that population growth and rising incomes in the developing world will sustain this trend," Bunge said in its 2001 annual report.
In addition, soybeans have steadily gained appreciation for their potential benefits to human nutrition.
Plans for the acquisition of Cereol were first announced in July, and Bunge purchased a 55% controlling stake from Edison S.p.A. earlier in October. Bunge announced it will tender for the remaining shares of Cereol, which are publicly held. All told, Bunge will spend about U.S.$800 million on the transaction.
World Grain’s sister publication, Milling & Baking News, recently discussed the future of Bunge in an interview with Weisser and Carl Hausmann, who until the acquisition was chairman and c.e.o. of Paris-based Cereol. Hausmann has been named president of Bunge Europe after the acquisition. The interview was conducted at Bunge headquarters in White Plains, N.Y.
A PRIME MATCH
Consolidation frequently is driven by a desire to boost efficiency, but Weisser said the efficiency benefits of the Cereol acquisition are uniquely compelling. "If you look at a map of our business locations, it looks like the pieces of a jigsaw puzzle waiting to be put together," he said. "Our business is a commodity-type business, which in the end requires skill and efficiency. The European business of Cereol imports 4 million tonnes of soybeans per year. We will now be able to handle all of this business through our own origination and storage in our silos in North and South America. Transportation will be handled through our logistics system."
Weisser said Bunge has had its eye on Cereol as an acquisition target for five years, but the genesis of this transaction may trace back even further. "In 1993, Bunge’s shareholders decided to hire professional managers, and I joined as part of this process," he said. "From 1993 until 1998, we basically restructured, selling assets that were not part of our core business."
The key divestitures were consumer product businesses in Argentina, Australia and Venezuela. Last year the company sold Plus Vita Ltda., a baking and other consumer food business in Brazil, to Grupo Bimbo S.A. de C.V. Even after the Cereol move, Bunge’s business extends well beyond oilseed crushing. In South America, the company remains the largest flour miller, and Bunge is also the largest dry corn miller in the world. In fertilizer, Bunge is the largest company in South America, with annual sales of U.S.$1.3 billion.
Bunge Global Markets operates in 20 countries. It was established in 1999 to merchandise agricultural commodities to destination markets globally.
But even the latter business has been shaped with a tilt toward oilseeds. The company is the world’s largest exporter of soy products to Asia and Europe. In the United States, Bunge exited the mainline grain storage business in the 1980s and acquired a number of storage assets along the southern Mississippi river, including the Great River Grain Corp. in 1991. The shift positioned the company well for soybean handling with more storage capacity along the Mississippi river than any other grain company.
More than other agricultural commodities, a global position in oilseeds handling and processing is particularly valuable, Weisser said. "The main reason it is more important to be global in soybeans as opposed to wheat or corn is that 83% of the world soybean crop is produced in the Americas," he said. "But the largest market in the world measured by consumption is in Europe.
"The second largest is the United States and the third largest is Asia. Europe and Asia do not have the agricultural land resources to raise soybeans. And the soybean is the best oilseed for use as a feed ingredient because you get 48% to 50% protein extracted from the seed. Nothing is comparable to that, which is why the soybean is so powerful and needs to be global."
While acknowledging the cyclicality of the oilseed crushing business, Weisser noted that the industry’s cycles are lengthy. He remains optimistic about prospects for crushing margins over the next several years. "We just started a new up cycle, and we believe this cycle will last," he said. "The previous down cycle from overcapacity ended in 1987. We expect it to last because of the long lead time needed to build new capacity and because of the increasing importance of scale. Plants are becoming larger and larger and therefore more expensive. Larger plants are linked to an integrated business model that reaches from the farm to the customer."
Weisser noted that current capacity utilization in the industry is extremely high. Expanding demand for soybean products will necessitate the construction of four plants per year (or equivalent expansion of existing capacity) over the next five years, he said. "We believe expansion is occurring in a disciplined manner and will not be disruptive to margins," he said.
Customers will benefit from Bunge’s greater efficiency but also from its dramatically increased geographic coverage, Weisser said of the Cereol acquisition. While Bunge has been well positioned to serve customers from the western Corn Belt, its assets were not as well placed to serve customers in the East. The exact reverse could have been said about Cereol’s U.S. business, Central Soya. In addition to its refineries and crushing facilities along the U.S. Eastern seaboard, Cereol also is the largest processor of canola in Canada through its CanAmera business. "Cereol provides a better footprint of plants from which to service our customers," Weisser said.
These benefits were emphasized by Hausmann. "At Central Soya we were satisfied to a certain degree with our market position, particularly our coverage of the Eastern seaboard, but we had customers like the largest quick-service restaurants or donut chains that wanted national coverage," Hausmann said. "Now, with this combination, we have refineries and packaging plants that give us good national coverage. And we will be able to refine 100% of our own crude oil."
From a business balance perspective, Weisser said that Cereol will increase the proportion of annual Bunge revenues derived from domestic businesses rather than exports. In addition to providing greater stability for the company’s earnings base, it will create outlets for Bunge’s South American export capacity.
Enormous fundamental differences exist on the demand side for edible oil between the United States and Europe, Weisser noted. In Europe, Cereol sells a mind-boggling 1 billion bottles of cooking oil per year, a vast volume that almost certainly will never be matched in the United States, where most oil is shipped as shortening to food service companies and food manufacturers. "The large market in the United States is for shortening rather than the oils," Weisser said. "Food service and processing industries purchase 92% of the packaged oils in the U.S. Only 8% moves into retail channels as bottled oils."
Hausmann cited a number of factors that explain the difference, including the more widespread presence of quick-service restaurants in the United States than in Europe. "People in Europe make their own mayonnaise with oil, they cut their own potatoes to make French fries," he said. "Almost no one uses a prepared salad dressing there. People use vinegar and oil. People in Europe cook much more, and they don’t have the proliferation of McDonald’s restaurants. The restaurateurs buy what oil they need in bottles from club-type stores."
Several other aspects of the Cereol business made the company attractive to Bunge, Weisser said. Cereol is the largest soybean meal producer in Spain, a country with rapid growth in the livestock business. The company has a similar presence in Eastern Europe, Weisser said. "Eastern Europe formerly was the breadbasket of Europe before declining under the Communists," he said. "As the economics of this region improve, we see potential growth not only for livestock production, but also consumption of vegetable oil. And there will be growth in agricultural production.
"Yields are going to go up and grain is again being exported from Eastern Europe. It won’t happen overnight, but we believe that there will be superior growth in this market over time."
As exports from Eastern Europe grow, Bunge will be well positioned to participate through Bunge Global Markets, Hausmann said. "Not only will Bunge be buying local oilseeds for production of oil to sell to local consumers, but Bunge looks to be more active in grain origination in general and also for the export market."
Commenting on the Cereol operations in Eastern Europe, Hausmann said the refining plants currently are as technologically advanced as those in Western Europe, though smaller in scale. While the overall infrastructure in Eastern Europe is clearly inferior to Western Europe, he declared, "Cereol feels very comfortable with our infrastructure. South America has the same problem, so Bunge has the experience it needs to navigate this market."
These differences aside, Bunge and Cereol are highly complementary, something that will facilitate integration, Weisser said. "Now that we have been able to plan the integration, I’ve been excited to see how the cultures are so similar," he said.
Restructuring to excel
Central Soya will fold into Bunge North America, as will the Canadian Cereol business, Weisser said. John E. Klein is president and c.e.o. of Bunge North America. As part of the integration, the name Central Soya will be replaced by the Bunge North America name.
Since it began restructuring in the 1990s, Bunge has made a determined effort to project a consistent corporate image worldwide, adopting the Bunge name, logo and matching — to an extent — the color scheme of office designs. For instance, in the United States, Lauhoff Grain Co. has been renamed Bunge Milling, Inc.
Bunge moved its headquarters to White Plains in 1999 from Sao Paulo, and the company is just now putting finishing touches on its headquarters. Though spacious and handsome, the facilities are not as large as one perhaps might guess for a diversified U.S.$11-billion agribusiness giant that has operated over three different centuries. "Our style, which we think contributes to our competitive advantage, is of decentralized organization with an entrepreneurial spirit," Weisser said. "I think our headquarters here is very small. Obviously, this works very well with a shared strategy, and helps give us the advantage of being fast to take advantage of opportunities as they occur."
A focus on soybeans means a focus on fat, and Weisser noted that the importance of fat in the diet and as a food ingredient has frequently been overlooked or disparaged by a public and media that often look at nutritional issues simplistically or myopically. Asked about the negative publicity surrounding trans fats, Hausmann noted that less than 20 years ago, the outcry against tropical oils was similar. Views have changed since then. "Nutrition experts are not saying tropical oils are bad for your health any more," he said. "It’s the quantity that you consume. If you use tropical oils, you get rid of the trans fat completely. But no one wants to put tropical oil in their products in the United States. It’s a question of what you want to see on your label."
Both Bunge and Cereol have devoted considerable resources to research and development. In September, Bunge held an open house at its Oil Center of Excellence, a new shortening and oil research center at Bradley, Illinois, U.S. The facility will centralize the company’s global research in shortenings, oils and other value-added grain processes.
Even within research and development, Hausmann noted a strong complementary relationship between the two companies. "Central Soya has made the largest commitment to the R&D side on protein, and we have laboratories that can build on this research," he said. "We will have the ability to better use our research facilities."
Benefits from the merger should accrue to customers of existing soy protein products such as concentrates and isolates, Weisser said. The two products have similar but not identical qualities and functionality, he noted. While Bunge is well positioned in isolates, Central Soya only produced concentrates. Both products are used primarily by the meat industry to improve shelf stability, but more recently concentrates have attracted considerable demand from the nutritional bar industry. "The ability to offer customers a complete array of soy protein products together with our increased geographic presence will be of great advantage to them," Weisser said.
Looking ahead to further opportunities for expansion, Weisser said Asia holds out considerable promise. While finding meaningful ways to build a presence in China has been challenging, Weisser cited considerable opportunity elsewhere. "We will expand in India," he said.