Soros-backed farms ripe for bid at 36% discount: Real M&A


Bloomberg | Jun 14, 2012

Soros-backed farms ripe for bid at 36% discount: Real M&A

By Rodrigo Orihuela

Adecoagro SA (AGRO), the agricultural company that counts George Soros as its biggest investor, is giving potential buyers the chance to get a hold of farms in Brazil and Argentina at a 36 percent discount to its net assets.

The producer of soybeans, sugar and rice slumped 21 percent in the past year, more than three times the average decline of similar-sized farming companies around the world, as investors shunned Argentine assets after the government seized YPF SA. That’s left the $1.1 billion farmland venture trading at 0.64 times its net asset value of about $14.78 a share, based on the average of four analysts’ estimates compiled by Bloomberg.

Adecoagro, which is listed on the New York Stock Exchange, is projected to post record revenue and profit next year as the United Nations says global food output must rise 70 percent by 2050 to feed a growing world population. While ties to Argentina have been a drag on the stock, HSBC Holdings Plc says most of the company’s growth will come from Brazil, potentially luring takeover interest from agriculture traders Bunge Ltd. (BG) and Cargill Inc. Adecoagro could command as much as $15 a share in a takeover, said ING Groep NV, a 57 percent premium.

“It does look cheap,” Ed Kuczma, who helps manage $30 billion at Van Eck Associates, said in a phone interview from New York. “Some of their farms are very valuable and some of the growth opportunities in Brazil are attractive for acquirers who are looking for more access to the story in Brazil.”

A spokeswoman for Adecoagro, which is run from Buenos Aires and incorporated in Luxembourg, didn’t respond to phone calls seeking comment.

Soros’s Investment

Adecoagro was formed in 2002 with the acquisition of more than 74,000 hectares (182,780 acres) of land from the Perez Companc family, according to its website. The company owned more than 290,000 hectares of land as of December 2011, divided among 23 farms in Argentina, 13 in Brazil and one in Uruguay, according to a regulatory filing. It also runs two sugar mills and ethanol plants in Brazil, as well as rice plants and a dairy plant in Argentina.

When the company first sold shares to the public in January 2011, Soros Fund Management LLC, founded by the 81-year-old billionaire, reduced its stake to 21 percent from 33 percent, according to regulatory filings. The firm is still Adecoagro’s largest shareholder. Michael Vachon, a spokesman for New York- based Soros Fund Management, referred questions about the potential for a takeover to Adecoagro.

Since its IPO at $11 a share, Adecoagro has fallen 13 percent as a lack of rain in South America in the second half of 2011 and early 2012 reduced crop yields and investors became more averse to Argentina because of potential political interference. Congress passed a law in December restricting the purchase of farmland by foreigners and in April nationalized YPF, the country’s largest oil company.

Argentine Risk

“They have the Argentine risk, but I believe that risk is being discounted in the shares more than it should be,” Alessandro Baldoni, an analyst at Deutsche Bank AG, said in a phone interview from Sao Paulo. “It’s a company with great assets. They will continue developing the Argentine assets but won’t buy more there. The trend is to grow more in Brazil.”

Adecoagro’s 21 percent stock decline in the last 12 months outpaced the average 5.7 percent drop among farming companies around the world with market values of at least $500 million, according to data compiled by Bloomberg.

The shares closed yesterday at $9.53, 36 percent less than its net asset value of about $14.78 a share, according to the average of four analysts’ estimates. The company’s largest asset is its farmland.

‘Undervalued’ Assets

“It’s pretty undervalued compared to its underlying assets,” Eric Conrads, who helps manage $1 billion at ING in New York, said in a phone interview. While Argentine government policies, land ownership rules and drought conditions have been a drag on the stock price, most of Adecoagro’s future growth will come from Brazil, he said.

Brazil is the world’s largest exporter of coffee, sugar and orange juice, the second-biggest supplier of soybeans and the fourth-largest for corn, data compiled by Bloomberg show.

Adecoagro is seeking to expand in the country, particularly in sugar and ethanol production. Last year, a majority of the IPO proceeds were designated for the construction in Brazil of a sugar mill, which is scheduled to start operating next year, Chief Executive Officer Mariano Bosch said on a conference call last month.

The company is projected to boost net income by 60 percent from last year to a record $89.8 million in 2013, according to analysts’ estimates compiled by Bloomberg and past results dating back to 2007. Revenue may also reach an all-time high.

Controlling Farms

The farming business stands to benefit as the United Nations’ Food and Agriculture Organization says food output needs to increase 70 percent by 2050 to accommodate a world population expected to reach 9 billion from about 7 billion now.

While an acquisition may not happen in the “short term,” buying Adecoagro would give agricultural trading companies, such as White Plains, New York-based Bunge and closely held Cargill, direct access to farmlands and crops, according to Pedro Herrera, an analyst at HSBC. Cargill and Bunge buy agricultural produce from farmers to sell or process. Cargill is the world’s largest sugar trader and also processes oilseeds, while Bunge processes sugar, oilseeds and corn.

“Instead of just buying from farmers, they’d go to control some degree of the supply,” Herrera said in a phone interview from New York. “Over time there’s this perception that there’s not enough supply to meet all the demand, and in order for big traders to have the supply, they will have to have some farms themselves.”

‘Very Unpredictable’

Spokesmen for Bunge and Minneapolis-based Cargill didn’t respond to phone calls and e-mails requesting comment.

Still, the majority of Adecoagro’s land is in Argentina, and the political risks there make it hard to determine an appropriate value for the company, said Kristof Bulkai, a fund manager at Thames River Capital LLP, a unit of F&C Asset Management Plc, which oversees more than 100 billion euros ($126 billion). Bulkai said his firm no longer owns shares of Adecoagro.

“The problem with Adecoagro is -- because of the big circus in Argentina and what is happening in Argentina -- it’s very unpredictable,” Bulkai said in a phone interview from London. “In a way it looks cheap optically, but if there’s no security of your owning your assets and the treatment these assets will get, you can put any price on them you want.”

Farming Consolidation

Nomura Holdings Inc. last week cut its forecast for Argentina’s economic growth to 2 percent this year from 3 percent, and forecasts for Brazil’s economic expansion have fallen for five straight weeks to 2.53 percent, according to the median estimate in a central bank survey of about 100 analysts. While growth may be slowing, Adecoagro’s revenue is largely driven by global demand and prices for commodities.

A takeover offer for Adecoagro would have to exceed its IPO price of $11 a share, according to ING’s Conrads. Major shareholders are unlikely to sell for less than $15 a share, he said, which would top the company’s estimated net asset value and represent a 57 percent premium to the stock’s closing price yesterday.

“Farming will become a more corporate, large-scale industry” as consolidation continues, particularly in Brazil, said HSBC’s Herrera. “Companies like Adecoagro will continue to grow. Investors don’t truly understand that the company’s growth will come from outside Argentina. That’s been part of the strategic plan all along.”

To contact the reporter on this story: Rodrigo Orihuela in Rio de Janeiro at [email protected].

To contact the editors responsible for this story: Katherine Snyder at [email protected]; Dale Crofts at [email protected].
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