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Bunge Q2 profit warning re-opens takeover speculation

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Bunge's admission today that second quarter earnings are likely to be "below the low end of the range of analyst estimates" has prompted a wave of speculation that the company is more vulnerable to a takeover. But Bunge insists a cost cutting programme will restore its shareholder value.

New York-based Bunge's full second quarter results are due on August 2nd. The company resisted an "informal approach" from Glencore over a "possible consensual business combination" in May this year, insisting the business was "committed to continuing to execute its global agrifoods strategy and pursuing opportunities for driving growth and value creation". Glencore's bid was widely interpreted as a move to extend its Canadian strength into the US market.

Bunge's first quarter earnings fell by 61% to $109 million, which it blamed on the large soya harvest in Brazil leading to weaker prices. This prompting growers to hold on to their crops in the hope of better values, but meant Bunge's crushing plants were short of material to process and sell. This factor - which also affected fellow ABCD Company ADM - persisted into Q2.

"Market conditions during the second quarter were challenging, driven by unprecedented farmer retention in South America, which pressured margins throughout the chain," noted Bunge chief executive Soren Schroder. "Increased farmer pricing early in July, as well as more dynamic markets and continued strong demand, lead us to expect much improved Agribusiness conditions in the second half of the year."

Aggressive cost-cutting

Bunge said it expects second quarter 2017 adjusted earnings to be "modestly profitable", but below market expectations due to the "challenging" global agribusiness market conditions. As a result, it is to take aggressive cost cutting action to rationalise the company's cost structure and re-engineer the way it operates, in a bid to reducing overhead costs by approximately $250 million over the next two years.

Mr Schroder says the process will target Bunge's costs in specific budget categories, "simplifying its organizational structure, streamlining processes and consolidating back office functions globally to improve efficiency and scalability". The projected 2018 capex spend will be reduced from $750 million to $650 million.

"Demand and margin trends are positive, but the Competitiveness Program is a transformational next step to re-engineer our organizational and cost structure, advance our growth agenda and create significant value for our shareholders," he said.

Shares down 0.48%

Bunge's Agribusiness division contributed $30.2 billion to its overall 2016 revenues of $42.94bn, and involved 134.6 million tonnes of commodities.

Glencore's Agricultural Products segment had 2016 revenues of $21.97bn fiscal 2016, down from $23.15bn in the previous twelve months. Crop marketing contributed $18.67bn and crop processing $3.29bn. The year saw 49.99% of the division sold to two Canadian investors for $3.1 billion as part of the wider Glencore group's massive debt reduction programme.

Bunge shares fell to $77.12 from the opening $78.68 on the Q2 warning, but had recovered to $78.28, 0.48% down in the opening figure.

By Jamie Day

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