Debt markets may be good compromise for Dreyfus
By Kevin Allison
The author is a Reuters Breakingviews columnist. The opinions expressed are his own.
Commodity traders are finding it harder to maintain their privacy. Louis Dreyfus is the latest to step out of the shadows. The venerable agricultural trader needs to invest if it wants to stay relevant in a consolidating and increasingly capital-intensive industry. But a float or merger would dilute family control. For now, plans to tap debt markets mark a sensible compromise.
Dreyfus made a net profit of $735 million on revenue of about $60 billion last year, according to the Financial Times, making it the world number three. Expansion must be funded internally or via bank financing, although Dreyfus also raised $2 billion from the sale of a natural gas pipeline and storage business last year.
New sources of funding may be needed if Dreyfus is to maintain its edge. Asia’s growing appetite for grains has lured rival commodity traders into agriculture. Half a decade of high prices and a scarcity of targets have pushed up acquisitions prices. Peers are investing in strategic assets, like silos and ports, and value-added activities, such as food processing, to gain competitive advantage.
True, Dreyfus already enjoys scale. But to keep up, it reckons it needs to invest $7 billion over the next four years – 40 percent more than in the previous four. Rivals are moving even faster. Glencore, the Swiss trader, raised $8 billion in a float last year and recently agreed to pay more than $7 billion including debt for Canadian wheat trader Viterra. Japan’s Marubeni is reportedly eyeing an acquisition of U.S. grain trader Gavilon for $5.2 billion.
Moreover, Margarita Louis-Dreyfus, who became the trustee of a controlling stake in the company after her husband’s death in 2009, needs to be prepared for a curve ball from minority shareholders. Other family members with 35 percent of the business hold options that could require Dreyfus to buy their shares.
Plans to issue bonds and list its Brazilian sugar and ethanol operations will deliver some financial flexibility. And Dreyfus certainly doesn’t need to do an initial public offering just yet. But the capital pressures aren’t going away. Dreyfus may one day have to choose between privacy and market position.