Cofco has agreed to pay $1.5 billion in cash for a 51% stake in Noble Agri, the loss-making agricultural unit of Hong Kong-based Noble Group, continuing the Chinese state-owned grain trader's recent deal-making spree as it seeks to secure the country's food supplies.
Cofco acquired a majority stake in privately-held Dutch grain trader Nidera in late February.
Cofco said a consortium of international investors led by private equity firm Hopu, which was founded by Fang Fenglei, the chairman of Goldman Sachs Gao Hua Securities, are set to join it as minority co-investors in the deal. Cofco will hold two-thirds of the investment vehicle, with the balance held by the Hopu-led consortium.
The deal was negotiated over three to four months after Cofco approached Noble Group, according to a source familiar with the matter. It is expected to close around September or October but is still subject to regulatory and shareholder approval.
Noble Group, which is listed in Singapore and trades metals and energy products as well as agriculturals, considered an initial public offering of shares for Noble Agri back in 2011. But that option had not been looked at for some time, the source familiar with the matter said.
JP Morgan was the exclusive advisor to Noble Group. Morgan Stanley and Hopu were financial advisors to the consortium.
Noble's metrics improved
For commodities trader Noble Group, the deal will effectively remove net debt of $2.5 billion from its balance sheet since it no longer retains control over the business.
It is also getting a wad of cash for selling a majority stake in a bleeding business. The net loss before tax, minority interests and extraordinary items attributable to the 51% stake was $225 million during the 2013 financial year.
"The simple answer is 'yes', this will help Noble. The agriculture business posted massive losses last year," said one Singapore-based bank analyst who declined to be named. “The market was worried that Noble would need to write down its agriculture assets because it was losing so much. It addresses a big concern in the market over the past year that the agri assets [would] have to be written down,” he said.
Noble Group’s shares closed 5% higher on April 2.
Cofco, in turn, will gain an international platform through which it can source commodities directly and is no longer beholden to international players such as Louis Dreyfus Commodities, ADM, Bunge and Cargill to supply grain and other commodities.
Analysts expect the partnership to help Noble, as Cofco is a major buyer of grains. “Cofco can guarantee a significant amount of flow. China buys 70% of the world's trading in soybeans and Cofco is one of China's biggest buyers. That creates certainty and I do think it will help profitability,” the analyst added.
Noble Agri stores and processes a wide range of products from sugar, grains, oil seeds to palm oil and cotton. It has major soybean crushing plants in China and Argentina and sugar mills in Brazil.
Over the past decade, China has gone from being self-sufficient in soybeans to being a key importer and accounting for about two-thirds of the world's market. Soymeal is a key feed for animals and as more Chinese consumers shift to protein-based diets, this is spurring demand for soymeal.
Frank Ning, chairman of Cofco, will assume the role of chairman of Noble Agri, while Richard Elman, founder and chairman of Noble Group, will take on the role of deputy chairman. Yusuf Alireza, CEO of Noble Group, will be the interim CEO.
The deal values Noble Agri equity at 1.15 times 2014 book value. As at December 31, 2013, Noble Agri had shareholder’s equity of $2.8 billion.
There is a conditional break fee on either side. If Noble Group is unable to get shareholder approval and terminates the agreement, it has to pay $15 million to the consortium. If Chinese regulatory conditions are not satisfied and the Cofco-led consortium terminates the agreement, they have to pay $15 million to Noble Group.
The deal is the largest outbound acquisition so far in the food sector by a Chinese state-owned enterprise and the largest outbound acquisition from China in the agriculture sector.
For now, it looks like China's concerns over food security are expected to keep the deal-mill turning.