Exclusive: Cargill close to agreeing purchase of ADM cocoa unit - sources

Reuters
A logo is pictured on the building of Cargill International SA in Geneva
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A logo is pictured on the building of Cargill International SA in Geneva August 4, 2009. REUTERS/Denis Balibouse

By Ange Aboa and Olivia Oran

ABIDJAN/NEW YORK (Reuters) - Cargill Inc (CARG.UL), one of the world's leading cocoa traders, is in the final stages of a deal to buy Archer Daniels Midland Co's (ADM) cocoa business, sources familiar with the situation said, creating a price-setting global giant.

Combining two of the world's top cocoa merchants and bean grinders would create a company big enough to compete with Zurich-based Barry Callebaut (BARN.SW), the world's largest maker of industrial chocolate products.

Cargill and ADM are hammering out the final details of the deal, said the sources, paving the way to the second major takeover this year in an industry that is set to be dominated by two firms. The timing of an official announcement is not known but could be made within days, the sources said.

"As the cocoa market will now be dominated by both Barry Callebaut and Cargill, the small players need to be competitive or they might risk being squeezed out of the market," said Vanessa Tan, an investment analyst at Phillip Futures in Singapore.

Financial details of the deal were not clear, although some sources had said this summer that the unit may be worth as much as $2 billion.

Cargill was long believed to be one of only a handful of companies with the expertise and focus on the niche cocoa business to buy ADM's business, which spans Africa, Asia and the United States. The U.S.-based agribusiness firm had begun conducting due diligence earlier this year.

In July, Barry Callebaut sealed its $860 million acquisition of the cocoa ingredients division of Petra Foods (PEFO.SI).

ADM started looking for potential suitors for the business late last year, sources have told Reuters, and the company announced it was in discussions about a possible sale in June.

An official at ADM declined to comment and Cargill would not comment beyond a short statement that said the privately held company continues to assess initiatives.

"We will communicate as and when there is anything definitive," a Cargill official said in an email on Tuesday.

Cargill beat out smaller rivals who were interested in picking up individual assets, but resisted buying the whole business, three sources familiar with the matter said.

Grinders turn cocoa beans into butter and powder, the main ingredients for chocolates. Cocoa butter, which gives chocolate its melt-in-the-mouth texture, is trading at its highest premium since 2008 in Asia, and is at eight-year highs in the United States due to tight supply and rising demand.

"Cargill and Barry Callebaut combined will account for more than 50 percent of global capacity. In the future, grinders like Blommer in the U.S. and smaller grinders in Asia will find it tougher and tougher to compete with the giants," said a Singapore-based dealer who has a grinding facility in Indonesia. "You might see consolidation among the smaller ones."

Some analysts and bankers have cautioned that competition concerns would arise, particularly in Ivory Coast and Ghana, the world's top two growers, where both companies own processing plants.

ADM, Cargill and Barry Callebaut account for as much as 40 percent of world cocoa bean grinding capacity and also dominate exports from the top producing nations, according to a United Nations report on the global cocoa industry from 2008.

Just 10 companies account for two-thirds of global grinding, the report said.

GRAINS VS COCOA

For ADM, the departure from cocoa would cement a shift towards the grains sector as it finalizes its $3 billion takeover of GrainCorp (GNC.AX), the largest bulk grain handler on Australia's east coast.

ADM also wants to cut its exposure to reduced profit margins that are resulting from rising cocoa processing capacity, traders said.

Cargill, which runs cocoa plants in No. 1 growing region West Africa, Brazil, Indonesia and in major consuming countries in Europe, has instead invested in the sector, betting on rising long-term demand as consumers in emerging markets develop a taste for chocolate.

It bought German cocoa grinder Kakao Verarbeitung Berlin in 2011 and in May began building a $100 million cocoa processing facility in Indonesia.

ADM has cocoa processing facilities in the United States, Ivory Coast, Ghana, Singapore and Brazil.

(Writing by Josephine Mason in New York; Additional reporting by Lewa Pardomuan in Singapore and Marcy Nicholson in New York; Editing by Ryan Woo and Kenneth Maxwell)

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