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ADM chooses poor time to get shot of cocoa division

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Archer Daniels Midland has chosen a less-than-ideal time to try to sell its cocoa business.

It is easy to understand why the US agribusiness giant wants to get shot of the unit, as it confirmed last on Thursday, saying that it currently engaged in discussions about the potential sale" of the division.

It looks increasingly anomalous in a group which has swung towards grain and oilseeds processing and trading.

Just look at the recent list of acquisitions, from 2011's purchase of Poland's Elstar Oils to this year's takeover of Australia's GrainCorp, besides the opening of an oilseed crushing plant in Paraguay and the Olenex edible oils joint venture with Singapore-based Wilmar, and it is easy to see where the group wants to go.

As ADM Patricia Woertz stressed on announcing the GrainCorp acquisition, rising incomes and world population were "driving increased consumption of grains and protein". Cocoa didn't get a mention.

Soft margins

But it might find a generous bid for the cocoa division hard to find.

ADM is selling when the market is hardly looking its best. Mediocre demand growth, at a time when prices have been underpinned by expectations of weaker West African harvests, has dogged processing profitability.

And just as margins have been improving in cocoa butter, particularly popular in the West as the basis of quality chocolate, margins cocoa powder, the other main processing product, used in the likes of biscuits and ice cream, have been sunk by a sell-down of Asian inventories hoarded last year.

Its cocoa business has struggled against this background, losing $22m in the first three months of 2013, compared with a $159m profit a year before, a figure which was itself swollen by a one-time boost from a revaluation of inventories.

Poor omen

Even if ADM can find suitors willing to look beyond the short-term difficulties to the potential for huge market growth ahead, should Chinese consumers get a taste in earnest for chocolate, the division is a big mouthful to swallow.

Valued at a reported $2bn, that is twice as much as Swiss-based Barry Callebaut is paying for the Petra Foods cocoa division.

And the Petra deal itself is a poor omen.

Not only has it removed Barry Callebaut as a potential bidder from the market, that deal has been poorly received by bond investors, who have seen the group's credit rating downgraded, and shareholders, who have missed out on the 2013 stockmarket recovery.

Western focus

There is also geography to think of too.

Of the 26 processing plants in ADM's "cocoa and other" division, 16 are sited in North America, and a further six in Europe.

That leave the division at risk of being wrong-footed should Asia indeed prove the driver of future cocoa demand, or if bean producing countries alter taxes to encourage processing in-country and capture more value themselves – as, for example, Indonesia has done in palm oil.

The most likely suitor looks to be a trade buyer which can wreak synergies from a purchase by mixing in the ADM cocoa operations with its own and cutting costs.

But given the size of the deal, there is hardly a long list of potential candidates, who might be best off ganging together for a consortium bid to reduce their outlay.


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