Noble China joint venture still faces market test
By Una Galani
The author is a Breakingviews columnist. The opinions expressed are her own.
Noble Groupās joint venture with China still faces a test from market forces. The Singapore trader is selling 51 percent of its agricultural business to a consortium led by state-backed COFCO for around $1.5 billion. Chinaās desire to control its food supply should guarantee volumes for the joint venture. But itās less clear that will translate into healthy margins.
The precise size of the COFCOās investment depends on how the unit, which processes everything from grains to coffee, performs over the next nine months. The final price will be equivalent of 1.15 times its book value in 2014. The headline price implies a valuation of $2.94 billion for the business, which accounted for 16 percent of Nobleās revenue last year.
The structure allows Noble to reduce its exposure to an underperforming business while sharing in any recovery. The prospect of a deal had already fuelled a 25 percent rally in Nobleās shares in the past month, lifting its market value to around $6.5 billion. The proceeds could be reinvested in Nobleās better-performing energy and resources businesses. And because Noble will no longer have to include the ventureās $2.5 billion of net debt on its balance sheet, its headline borrowings will roughly halve, according to Eikon.
The joint venture is another step by COFCO towards building a global trading platform for agricultural commodities. China wants to reduce its reliance on the so-called Big Four āABCDā traders ā Archer Daniels Midland, Bunge, Cargill and Louis Dreyfus. Last month, COFCO led the purchase of 51 percent of Dutch grain trader Nidera for $1.3 billion. But with few large independent targets left, scaling up to match its rivals in size and pricing power may be a challenge.
For Noble investors, the lingering worry is whether or not COFCO, which is already Chinaās main wheat importer, will run the joint venture as a commercial entity. The involvement of China-focused private-equity group HOPU in the Noble deal offers some comfort. So does China Investment Corporationās 14 percent stake in Noble, which it has owned since 2009. If China does decide to squeeze Noble, it shouldnāt do so too hard.