Special Edition: Feed Industry Consolidation Review
No let up expected in aqua feed M&A activity: PwC
FeedNavigator: Do you see much M&A activity happening in the animal feed manufacturing space in the next 12 months?
Christopher Nolan: Yes, I expect continued M&A activity in the animal feed space for the next 12 to 24 months, with a focus on aquaculture. Many of the animal feed companies I speak with have aquaculture high on their M&A priority list.
Over the past 18 months, there has been a significant amount of global M&A activity in animal feed, particularly within the aquaculture subsector. Aquaculture is a growing area of interest among animal feed companies given the expected increased importance of seafood as a source of protein to feed the projected global population of more than 9 billion in 2050.
For example, one of the drivers behind SHV Holdings NV’s US$3.7bn acquisition of Nutreco, announced in October 2014 and closed in March 2015, was Nutreco’s market leading position in aquaculture.
Another leading animal feed player, Cargill, has been actively investing to expand its market position in aquaculture and has completed two recent transactions in the space – the US$1.5bn acquisition of Norwegian salmon feed producer EWOS in August 2015, which followed Cargill’s US$30m investment in July 2015 in a joint venture with Naturisa SA to develop a shrimp feed facility in Ecuador.
More recently, in February of this year, Cargill and others, including Aqua-Spark, the global fund focused on sustainable aquaculture, invested US$30m in Calysta Inc, a Menlo Park-based producer of sustainable protein ingredients for aqua feeds.
Another recent aquaculture deal includes Alltech's acquisition of Coppens International, a leading Dutch supplier of fish feed.
But it is not just animal feed companies investing in aquaculture. Private equity firms and sovereign wealth funds are also reviewing the aquaculture subsector for future investment, given the relatively strong revenue growth projections for the category. For example, in November 2015, KKR invested nearly US$100m for a significant minority stake in Chinese aquatic feed producer, Yuehai Feed Group Co.
FeedNavigator: What trends are driving acquisitions in the animal feed production sector?
Christopher Nolan: I believe that the primary driver for continued M&A activity in animal feed is the projected increase in world demand for animal protein. This increase is driven by the expected global population growth as stated above, and more specifically, the significant growth of the global middle class. While the world’s population is expected to grow by 33% between 2015 and 2050, according to the Food and Agriculture Organization of the United Nations (FAO), global protein demand is expected to increase by 70% over the same period.
As seafood will likely serve as a significant portion of growing protein demand, aquaculture has been one of the fastest-growing subsectors of animal feed and many animal feed producers have pursued investment in aqua feed.
Demand for seafood globally is strong and is expected to continue to rise. For example, global seafood sales are expected to rise by 5% in 2016, the largest annual gain since 2011. In addition, farmed seafood now comprises more than half the total global consumption of seafood, with ‘wild catch’ falling below 50% for the first time ever.
In fact, the World Bank estimates that nearly two-thirds of seafood consumed in 2030 will be farm-raised – and it is farm-raised seafood that drives the rising demand for aquaculture.
FeedNavigator: What challenges face the big 4, the ABCD of ADM, Bunge, Cargill, and Louis Dreyfus, given the high grain stocks globally, idle processing facilities and lower profitability for those companies in past 18 months? Are they going to diversify through acquisition?
Christopher Nolan: The challenge for the large commodity agribusinesses is having the right operating strategy in order to manage an industry downturn.
Given the current conditions in the agricultural markets, combined with the overall uneasiness in the global economies, agribusiness executives are faced with the daunting challenge to grow their businesses, and such growth, in most cases, from internal or organic opportunities is limited.
As a result, many agribusinesses engage in M&A, either to supplement or accelerate their organic growth efforts or to pursue diversification opportunities in higher-growth and/or higher-margin end markets.
Cargill has recently made a number of acquisitions that either accelerate its organic growth opportunities or allow it to diversify into other food or ag businesses that the company expects will provide it higher growth and/or higher margins.
Responding to the projected global increase in the demand for protein, Cargill [as I earlier noted] has recently completed several acquisitions in the higher-growth aqua feeds market and has recently broadened its participation in the poultry value chain in Asia by entering an agreement with Jollibee Foods to build and operate a poultry processing plant in the Philippines.
In addition, Cargill just recently acquired Texas-based Five Star Custom Foods, a business specializing in cooked protein products for food service and food processors.
As discussed by their respective CEO’s in their most recent quarterly calls, a key part of each of ADM’s and Bunge’s strategic plan includes acquisitions to address some of the growth and profit margin challenges that each company is facing.
For example, in order to complement ADM’s relatively recent and significant investment in the high-growth, high-margin WILD Flavors business, ADM recently acquired the remaining 40% stake in Amazon Flavors, a leading Brazilian manufacturer of natural extracts, emulsions and compounds. ADM expects significant revenue synergies from the acquisition.
Earlier in this calendar year, ADM announced its intention to acquired Harvest Innovations, a non-GMO, gluten-free and organic soy processor, to increase its presence in this growing market.
Also earlier this year, Bunge announced its intention to acquire a controlling stake in Walter Rau Neusser Öl und Fett, an oils and fats producer based in Neuss, Germany, which will allow Bunge to expand its product offerings while leveraging its expertise and geographic reach in oilseed crushing and refining.
Louis Dreyfus Company BV, which recently changed its name from Louis Dreyfus Commodities BV in order to de-emphasize the 'commodities' portion of the company’s portfolio, continues to review M&A opportunities globally, but is now more focused on securing partners for some of its non-core businesses, including metals trading, orange juice, dairy, and fertilizers.
FeedNavigator: Is the market in international grain trading shifting (Cofco buying Noble Agri, Nidera)?
Christopher Nolan: While the international grain markets continue to be dominated by the ABCD companies, Chinese investors have become more prominent in the grain markets as they seek to source grains from producing geographies in order to satiate demand from China’s growing population.
Cofco’s acquisition of a 51% stake in Nidera is expected to provide China with greater control over pricing and better access to major grain-growing regions, such as Latin America and Russia.
Similarly, Cofco's acquisition of Noble Agri (now Cofco Agri), one of the top global grain traders, is also expected to allow China greater access to grain producing regions.
Chinese deal making is only just beginning to impact the agribusiness landscape, and I expect continued Chinese M&A activity in agribusiness in order to increase China’s agmarket presence.
Shuanghui International Holdings’ acquisition of Smithfield Foods Inc. and ChemChina’s intention to acquire Syngenta AG are clear examples of China’s desire to invest further in agribusiness.