Louis Dreyfus a 'potential target' for Glencore

Glencore's agriculture division, potentially worth more than $7bn, may be ready to exploit the shake-up in Canada's grain trading regime, and have rival Louis Dreyfus on its shopping list.

The ending of a blackout period following Glencore's stockmarket flotation prompted a slew of reports on Wednesday from banks involved in last month's IPO - and lifted the lid further on a commodities group which, until its listing, had been famously secretive.

These briefings included an analysis by Citigroup's Heath Jansen that Glencore's core agriculture division, covering operations from grain farming in Russia to cotton trading, is worth $7.3bn, with a further $313m on top for stakes in farm-related enterprises.

However, with this representing a small part of the group's total fair value, estimated by different banks at $68.3bn-71.6bn, analysts highlighted the potential for Glencore to expand through deals in farming, besides other sectors.

Deals ahead?

"We expect the company to leverage its global network of contacts to execute deals and add to the asset base," Credit Suisse analysts said, citing French commodities group Louis Dreyfus as a "potential target".

"We believe a focus on bolt-on/mid-size assets, private companies and consolidating minority stakes is the most value accretive strategy going forward."

Privately-held Louis Dreyfus last year considered a merger with Olam International, the Singapore-listed multi-commodities company, and was in April reported to be considering its own flotation in a quest to facilitate its ability to raise funds.

'Stiff competition'

Credit Suisse also highlighted Glencore's minimal exposure in agriculture to North America, a hugely important area for the market, with managers citing "stiff competition in the US and, in Canada, due to the power held by the Canadian Wheat Board".

The comments come as Canada is planning legislation to ditch the board's monopoly over grain exports from the Prairies, the country's agricultural heartland, a grip which has turned the CWB into the world's top shipper of wheat and barley.

Gerry Ritz, Canada's agriculture minister, on Wednesday warned that the monopoly had meant "grain innovation has become stagnant", leaving farmers more likely to grow canola, with the board "standing in the way" of the country realising its potential.

Glencore has already made strides into grain trading in Australia, which stripped AWB of its monopoly on wheat exports three years ago.

However, the group declined to comment to on any plans for exploiting deregulation in Canada, nor on any appetite for buying Louis Dreyfus.

Russian positions

A report from UBS also highlighted that Glencore may have made hefty profits last year from long positions in grains, bought on its own account, in the early stages of the Russian drought which set the stage for the market rally.

"The agricultural team received very timely reports from its Russian farm assets that growing conditions were deteriorating aggressively in the spring and summer of 2010, as the Russian drought set in," UBS said.

"This put it in a position to make proprietary trades going long wheat and corn."

UBS placed a "buy" rating on Glencore shares, with a price target of 630p. Credit Suisse started Glencore with an "outperform" recommendation and a target of 600p, while Citigroup rated the stock a "buy" with a target of 570p.

The shares closed in London up 0.2p at 486.55p.

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