Archer-Daniels-Midland Company (ADM), which procures, transports, stores, processes, and merchandises agricultural commodities and products, announced the biggest acquisition ever by the company. This article discusses the acquisition rationale and its long-term benefits. Also discussed are the other positive factors, which make Archer-Daniels an attractive investment option.
Archer Daniels announced the acquisition of Wild Flavors GmbH for a consideration of Euro 2.2 billion or $3.1 billion. The acquisition value represents 14.1x 2015E EBITDA for Wild Flavors, which is a Switzerland-based natural food flavoring and coloring specialist.
Wild Flavors, which is expected to reach sales of Euro 1 billion in 2014 is renowned as an innovative partner in beverage development. The company has customized products with superior taste and natural colors and caters to more than 3,000 customers in more than 130 countries. The company’s regional diversification is 27% in North America, 60% in EMEA and 13% in Latin America, Asia Pacific and India.
Considering the acquisition rationale, both the companies have a common strategy of adding value of basic agricultural raw materials. Further, both the companies are looking to make inroads in Brazil, India, China and Southeast Asia. This makes a strong case for good acquisition synergies.
Also, another visible benefit is the increase in customer base for Archer-Daniels after the acquisition. Archer’s primary focus has been to work with medium and large consumer packaged goods firms. Wild Flavors, on the other hand, works with small, medium and large food manufacturers. The overall customer base therefore broadens significantly for the company.
For Archer, the acquisition is also expected to provide synergies benefit in the range of $130 million to $140 million annually by the third year with most of the synergies coming from higher revenue growth.
Another long-term plan from the acquisition is to gradually move towards relatively high margin generating business from the current commodity related business, which tends to have volatile margins.
However, this is likely to happen gradually and with more strategic business shifts as a high percentage of the business will still be commodity based (even after acquisition). On a pro-forma basis, the Wild Flavors acquisition will constitute 12% of the company’s revenue as of 2013. I believe that the acquisition is a signal from the company that it is looking to expand its presence in high margin businesses and there can be further high margin business acquisitions in the future.
Apart from the acquisition, the global demand for speciality ingredients will be one of the major growth drivers for Archer-Daniels. The company is already a leading global provider of speciality ingredients serving food, beverage, personal care, health & wellness customers. As the global specialty food ingredient market is expected to be worth $100 billion by 2023, Archer-Daniels will be one of the key beneficiaries of the growth.
Archer-Daniels already announced its plans and intentions to grow in Asia Pacific and I believe that the company’s high focus on the region is a positive factor. The company is investing in feed and food production with the addition of two new production facilities in China. The sweetener facility is expected to be fully operational in early 2015, with the soluble fiber facility operational in the second half of 2015. With both these facilities expected to be operational in 2016, revenue growth will be supported.
Archer-Daniels also holds a 16.8% stake in Asian agribusiness Wilmar International Limited and a 19.85% stake in Australian agribusiness GrainCorp Limited. Through these investments and stake, the company is increasing its presence in a strong way in Asia Pacific. Therefore, there are ample reasons to be positive on the company for the long-term.
In conclusion, the company’s acquisition is the first step towards relatively high margin business and it is likely to translate into long-term benefits for the company. Archer-Daniels currently trades at a forward (2015) PE of 13.5, which is at a slight premium as compared to Bunge (BG), which trades at a forward (2015) PE of 10.7. However, I believe that the premium makes sense with the current acquisition and also considering the fact that Archer-Daniels has a bigger global presence as compared to Bunge.
I also like the strong investment and focus by the company in Asia Pacific. This region will drive the company’s earnings growth in the future. Archer-Daniels also offers an annual dividend of $0.96 and a dividend yield of 2.1%. At a current market price of $46.5, the stock looks like a good long-term investment.