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As Food Surges, So Do Food Company Valuations



After Anglo-Australian miner BHP Billiton made an eventually unsuccessful US$38.6 billion offer for agriculture-focused Potash Corp., deal makers began adding food options to their menus.

In Asia, the result has been a rich diet of food company deals, with more expected—and raising a question about whether investors might eventually end up with indigestion.

Higher prices in both raw and processed soft commodities—caused by growing Asian demand, erratic weather, and a global push toward biofuels—has led to a spate of food-focused merger deals and initial public offerings. Food quality concerns in China and fears of radioactive exposure in products in Japan amid the nation’s ongoing nuclear crisis have added to the trend.

“There is a very active deal environment in the global agribusiness and the commodity price environment is a key driver,” said Russ Colaco, an executive director in Morgan Stanley’s consumer investment banking team in New York. He added, ” Higher prices are a catalyst for mergers to create greater scale and capital raising to strengthen balance sheets.”

As a result, Asian agriculture-focused companies tend to be valued better than their other counterparts, though they still trail the surge in underlying food products. Between March 2010 and March 2011, for instance, global food commodity prices—including cereal, vegetable oils, meat, seafood, sugar, bananas, and oranges—as measured by the IMF’s Commodity Food Price Index rose 32%. In that time, the valuations of Asia-Pacific Agricultural business rose 19% and traded at 3.70 times book value from 3.12 times in March last year, according to data provider CapitalIQ. They currently trade at 3.84 times book value. Meanwhile, valuations of the MSCI Asia Pacific Index have fallen 4%.

Nine Asian agriculture companies that listed in the last 12 months trade at total enterprise value of 6.01 times to sales, compared with the 4.48 times the 235 agribusinesses that are already listed in Asia, according to CapitalIQ. Enterprise value combined market capitalization with net debt.

“Overall, the nine Asian agricompanies that were listed in the last 12 months are valued higher than the total basket, suggesting better investor sentiment for recent IPOs,” said Chris Rynning, chief executive officer of Beijing-based Origo Partners. In early March the private-equity firm bought a 21% stake for US$13 milion in privately owned rice producer China Rice, in the London-listed private equity firm’s first foray outside clean-technology and natural resources in China.

“The opportunity in agricommodities is that it’s a high-growth sector, and yet competition is not so high and it’s a less beaten investment path in China than internet companies, for instance, which trade on crazy valuations.”

In recent months, prices of wheat, corn, soybeans and other agricultural products have soared globally, in part because of bad weather, but also because demand remains strong, especially from livestock farmers in developing and emerging countries. In a report last month, the International Monetary Fund noted that its food price index—which tracks the spot prices of the 22 most internationally traded agricultural food items—was close to its 2008 historic peak.

One of the biggest drivers of food and metals prices has been China, so it’s not surprising that Swiss commodities trader Glencore International AG is looking to list in Hong Kong as well as London. Being able to tap the stock market would give Glencore access to a source of financing that is unavailable to many of its unlisted competitors, among them France’s Louis Dreyfus and Minneapolis-based Cargill, and a presence in Hong Kong brings it that much closer to China.

Now others in the long-secretive and privately held world of agricommodities trading could tap IPO markets, says Morgan Stanley’s Mr. Colaco, who says that way “many agribusinesses in emerging markets would be able to accelerate their growth plans with access to additional capital.”

Branded foods trade at even higher valuations, say bankers, than the smaller agribusiness plays.

“Agricommodities is becoming a big area for deals and these businesses have become more attractive over the last few years,” said Mark Warburton, head of equity capital markets for Asia at Macquarie Capital, which advised on the US$204 million Hong Kong IPO of milk formula producer Global Dairy Holdings Ltd., and is advising on the IPO of a “branded Chinese food company” this year that he declined to name. “Food companies in China are generally trading at attractive multiples, and with food security becoming more important, companies related to agriculture and food are in demand.”

Banks too, are taking notice of the opportunities, with banks such as UBS AG in the process of hiring an agribusiness analyst to cover the sector, said Peter Hickson, UBS’s Hong Kong-based global head of commodity research.

The question for investors buying into these richly valued IPOs or buyers ponying up for pricier deals is whether the valuations will hold up. The argument for deal makers that rising food consumption is a long-term trend has merit, as increasingly affluent Asians add new types of food and bigger servings to their diet. But as BHP’s blocked bid for Potash shows, matters don’t always go as planned.

Write to Nisha Gopalan at [email protected]