An Agribusiness Alliance

by Teresa Acklin
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A new partnership between Gruma and ADM will create a "significant competitor" in the U.S.$1.5-billion Mexican wheat flour market.

   Archer Daniels Midland Co., Decatur, Illinois, U.S., a global agribusiness company, and Gruma S.A. of Mexico City, the world's largest producer of maize flour and tortillas, announced in late August a definitive agreement under which ADM will acquire a 22% stake in Gruma. According to the companies, the partnership will strengthen Gruma's financial status and position ADM to participate in the long-term growth potential of Gruma and its markets.

   The agreement will increase the capacity and efficiency of Gruma's U.S. maize flour operation and create a new competitive venture in the U.S.$1.5-billion Mexican wheat flour market, the companies stated. Following completion of the transaction, Gruma's expected market capitalization will be the largest of any food company based in Mexico, they added.

   Dwayne O. Andreas, chairman and chief executive officer of ADM, said, "This partnership helps ADM accomplish two important objectives. As a long-time participant in the Mexican marketplace, we are very confident about Mexico's future and believe long-term investment in Mexico provides a very attractive growth opportunity. We also know the maize flour industry quite well, are very enthusiastic about its growth potential and have thoroughly reviewed the alternative strategies for expanding into the maize flour industry."

   Eduardo Livas, Gruma c.e.o., said, "This partnership builds upon the core strengths of both companies leading positions in high growth markets, superior technology and manufacturing bases and a focus on production and distribution systems that allow us to sustain a dynamic growth rate."

   According to the companies, the partnership would combine Gruma's maize flour production technology and operational expertise with ADM's logistical resources, wheat flour production technology and financial strength. Under terms of the agreement, Gruma will receive U.S.$258 million in cash; an 80% share in the combined U.S. maize flour operations of the two companies; access to ADM's U.S. maize purchasing, handling and transportation network; a 60% share in a joint venture consisting of ADM's wheat milling technology and Mexican-based wheat flour mills; and exclusivity in certain maize flour and wheat flour markets.

   Gruma will manage and operate both the maize flour operations and the Mexican wheat milling operations. The company's other subsidiaries, including the company's Central American division, will not be altered by the transaction, the companies said.

   In return, ADM will receive 74.7 million new shares of Gruma, which will represent 22% of Gruma's common stock; two positions on the 11-member Gruma board; and minority ownership positions in the U.S. maize flour and Mexican wheat flour operations. Gruma and ADM said the savings in interest expense resulting from the transaction were expected to more than offset the effect of dilution in earnings per share.

   Mr. Andreas said Gruma had state-of-the-art maize flour production technology, "superb operational expertise and highly professional management."

   "Partnering with Gruma is an ideal way for ADM to participate in the long-term growth of the Mexican economy and the North American maize flour industry," he said.

   Dr. Livas said the partnership would "significantly strengthen" Gruma's growth potential.

   He added that an advantage of the agreement would be Gruma's immediate entry into the Mexican wheat flour market.

   "Like the traditional maize milling market that Gruma has revolutionized for nearly 50 years, the market for wheat flour in Mexico is highly fragmented and inefficient," he said. "By adding ADM's state-of-the-art production technology and current market position to our existing operating infrastructure, we believe Gruma will be as efficient in wheat flour as it is in maize flour."

   Following completion of the transaction, which was expected by the end of September, the Gruma and ADM joint ventures will represent about 25% of the U.S.$660-million maize flour and maize dough market and will be a "significant competitor" in the U.S.$1.5-billion Mexican wheat flour market, according to the companies. In addition, Gruma will use the U.S.$258 million it receives to repay debt and to increase cash reserves, saving approximately U.S.$30 million in annual interest expense.

   Completion of the transaction is subject to approval by Gruma shareholders and final approvals by Comision Federal de Competencia (the Mexican antitrust commission) and other regulatory agencies in the United States and Mexico.

   The combined U.S. maize flour operation of Gruma and ADM had 1995 revenues for the past 12 months of more than U.S.$180 million and total capacity of 515,000 tonnes per year. ADM's Mexican wheat flour operation has total capacity of 250,000 tonnes per year.

   As Gruma expands its operations outside of Mexico, the partnership provides for the company to have access to ADM's global plant facilities and product distribution network in Europe, Canada and Asia. Gruma currently operates 17 maize mills in Mexico, three in Central America and one in South America.

   Gruma's operations in the United States include Mission Foods Corp., the nation's leading producer of tortillas with a dozen plants, and Azteca Milling Co., which operates maize mills in Texas and Indiana. According to a recent financial analysis in an international edition of El Financiero, a daily business publication in Mexico, Gruma USA accounted for 25% of the parent company's operating profit in fiscal 1995.

   ADM's operations in Mexico include a Mexico City wheat flour mill it acquired in 1994 and several maize mills and masa plants.

   ADM operates 29 U.S. wheat flour mills with a total daily milling capacity of nearly 7,900 tonnes in terms of flour, making it the second largest U.S. milling company behind ConAgra, Inc. ADM also operates six mills in Canada with a total daily wheat flour capacity of about 1,340 tonnes in terms of flour.

   The company's net income from all operations in the year ended June 30, 1996 was U.S.$695,912,000.

   Gruma's annual sales are more than U.S.$1.2 billion. In addition to maize flour and tortilla production, Gruma also is involved in a baking plant in Mexico City that produce breads through a joint venture with George Weston North American Bakeries, Toronto, Canada.

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