Cargill is in better financial shape than rivals Archer Daniels Midland and Bunge – a factor which provides it with the ammunition for further acquisitions.
At least, according to Fitch Ratings, which gave the company a credit rating of “A”, with a “stable” outlook – actually the same as ADM, but above the “BBB negative” afforded to Bunge.
Still, Cargill’s “financial profile is stronger than that of ADM, with much lower leverage and stronger free cash flow”, the ratings agency said, while against Bunge terming Cargill as “much stronger” in financial profile terms.
Indeed, Fitch said that it “believes the company’s extensive geographical presence spanning nearly all agricultural commodities gives Cargill a clear advantage versus its competition”.
‘Improved earnings trajectory’
The assessment reflects not just Cargill’s larger size, with annual revenues of some $110bn, compared with $62bn for ADM, and $46bn for Bunge.
Fitch also noted an “improved long-term earnings trajectory” at Cargill, although ruling out a repeat this year of the 85% surge to $3bn in adjusted operating earnings in its last financial year, to May 2017, “following several years of earnings stagnation.
“The improvement was driven by several factors including strong performance in North American beef and improved operational performance in several food businesses… combined with benefits from cost savings initiatives, reorganisation and portfolio rebalancing,” the agency said.
For the current financial year, Fitch said it was “forecasting only modest earnings improvement,” with “strong” but slower growth in the meat division, while results in the origination and processing arm “remain pressured by industry fundamentals which are not expected to materially change in 2018”.
‘Flexibility to consider M&A’
Still, the uptick in earnings has helped Cargill – one of the world’s largest private companies, financial details on which remain scarce – cut its leverage to 0.6 times earnings before interest, taxation, depreciation and amortisation (ebitda), down from 1.6 times in May 2015.
This in turn gives Cargill “flexibility to consider M&A [merger and acquisition] opportunities.
Indeed, “given fewer internal investment opportunities in 2018”, Fitch flagged the potential for “strategic bolt-on M&A that builds upon adjacencies” that are “expected to be largely financed with internal cash flow and supplemented by debt issuances”.
Of course these comments come at a time when deal talk is in the air, with ADM said to have made an offer for Bunge, which last year received an approach from Glencore.
In one sense, Cargill might covet Bunge too, in that according to Fitch “Cargill is focused on M&A opportunities where the company can lead in scale, capabilities or profitability”.
That said, before even considering antitrust concerns, the thrust of Cargill’s deal drive has been into more specialist and higher margin areas, such as October’s acquisition of Diamond V, whose products aim to boost animal immunity.
But should any takeover of Bunge throw off some businesses for sale (as, for example, last year’s Dow Chemical-DuPont tie-up did in agrichemicals) Cargill would certainly be well placed to snap-up the tidiest offcuts.