Bunge may sell money-losing Brazil sugar unit -new CEO

Reuters

By Tom Polansek

CHICAGO, Oct 24 (Reuters) - Bunge Ltd's new chiefexecutive signaled plans to shed its loss-making Brazilian sugarmilling business, making Bunge the first major merchant toconsider exiting the one-hot sector that has swallowed billionsof dollars of investment.

Bunge reported a quarterly net loss of $137 million as thesugar unit dragged on earnings. Shares fell 1.4 percent afterthe loss, and a sharp revenue drop that surprised analysts.

Chief Executive Soren Schroder said the company waslaunching "a thoughtful comprehensive review" of its Brazilianmilling operations, which have suffered from poor crop weatherand low global sugar prices.

The company has not yet discussed a potential sale of themilling unit with any suitors, Schroder later told Reuters in aninterview. The replacement value of its milling assets is morethan $3 billion, he said. Schroder, who took over as CEO inJune, gave no time frame for the review.

It has been about six years since Bunge and other globalfirms including oil major BP PLC and Singapore-listedOlam raced to grab a share of the sweetener businessin Brazil. The companies bought up mills and farms in a bid tovertically integrate their businesses and in a bet that tightsugar supplies and a growing ethanol market would boostearnings.

Analysts have estimated that Bunge spent more than $2billion buying up assets in Brazil, and now operates eightsugarcane mills with a combined crushing capacity of 20 milliontonnes of cane a year, which it processes into sugar andethanol.

But those Brazil bets have soured in recent years with localcane mills, which produce both sugar and ethanol, hit hard byrising costs of doing business and Brazilian government caps ondomestic fuel prices, which hurts returns on ethanol.

So far, most other companies have hung on. In December,Louis Dreyfus' local sugar and ethanol milling spinoff BioSevsold its Usina Sao Carlos in Sao Paulo state for 200 millionreais ($90 million) to rival milling group Sao Martinho.

JPMorgan analyst Ann Duignan said she was "encouraged" byBunge's exploration of options for its sugar business.

Some analysts saw it as a dark omen for Brazil's ethanolsector. They wondered how Bunge would find a buyer amid suchuncertainty.

"This is a bad signal for the sector," said Cesar MariaBorges, director of sugar and ethanol analyst JOB Economia.

"The expectation of Bunge when it entered the productiveside was that there was money to be made. The problem, eventhough sugar prices are low, is on the ethanol side, which is 50percent of the cane business."

Schroder said it has been challenging for Bunge to transferits strengths in other agribusiness areas such as grains andsoybeans to sugar. He noted that the company is growing sugarinstead of just trading it, and also dealing with complicationsbecause of government fuel price controls in Brazil.

Sugar and biofuels are a small part of Bunge's overallagriculture business, accounting for only 7 percent of net salesin the nine months to Sept 30.

WEAK RESULTS

Bunge is among the four large players known as the "ABCD"companies that dominate the flow of agricultural goods aroundthe world. The others are Archer Daniels Midland Co,Cargill Inc and Louis Dreyfus Corp.

Some of those have also moved to shed peripheral parts oftheir business in order to refocus on their core. ADM is said tobe in the final stages of selling its billion-dollar globalcocoa business to Cargill, sources have said.

Bunge reported a net loss of $137 million for the thirdquarter, compared with a profit of $289 million a year earlier.The loss amounted to 94 cents per share, against a profit of$1.92 per share a year earlier.

Revenue slipped to $14.7 billion from $16.5 billion a yearearlier, and came in below analysts' average forecast of $16.9billion, according to Thomson Reuters I/B/E/S.

The sugar and bioenergy division reported a loss of $19million. Bunge recorded an after-tax charge of $415 millionprimarily related to that business.

Results for Bunge's traditional agribusiness business ofbuying, selling and processing crops like soybeans fell duringthe quarter, as supplies remained tight due to last year'ssevere U.S drought. Large U.S. harvests are expected to promotestrong results in the fourth quarter, even though the U.S. cornand soy harvests are advancing later than normal this autumn.

Soy processing margins in North America are strong due tolean inventories, large harvests and greater demand forlivestock feed, said Drew Burke, Bunge's chief financialofficer.

"North America and the Black Sea should see strong grainexports as the world restocks inventories after an extendedperiod of tight supplies," Burke said.

Cargill this month reported a 41 percent drop in quarterlyprofit due to lingering effects of the drought.

CAPITAL EXPENDITURE CUTS

In July, Bunge said it has cut its plan for capitalexpenditures in 2013 to $1 billion from an earlier projection of$1.2 billion. The company plans a 2014 capital expenditurebudget of $900 million, "with a focus on growth and productivityprojects with shorter paybacks," Burke said.

Bunge shares slipped 1.4 percent to 79.82, but remain about10 percent higher on the year. Shares of ADM, which is due toreport quarterly results on Oct. 29, are up 43 percent so farthis year.

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