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Bunge Plans a Merger and a $2 Billion Share Repurchase – Buyback Wednesdays

  • June 21, 2023

AutoZone, Inc. (AZO), the automotive replacement parts retailer, made a significant announcement on June 14, 2023. The company revealed its intention to carry out a massive $2 billion additional buyback, which accounts for approximately 5% of their market capitalization at the time of the announcement. AutoZone has been consistently repurchasing its shares, earning it the label of an “uber cannibal” according to Mohnish Pabrai, referring to a company that aggressively buys back its own stock. While AutoZone remains an active participant in the realm of uber cannibals due to its ongoing series of buybacks, it has also found a place on another list called the Double Dipper, a custom screen created by InsideArbitrage.

The Double Dipper consists of companies that engage in share buybacks while their insiders independently purchase stock on the open market for their personal portfolios. Notably, AutoZone’s Chief Information Officer, Michelle Borninkhof, was identified as an insider who independently acquired shares of the company during the past week. For further details, you can refer to our last Insider weekends article.

This week, we decided to focus on Bunge Limited (BG) because the company recently announced a merger alongside a large buyback.

Key Insights:

  • Bunge (BG), a global agribusiness and food company, operates across the entire food chain, from farming to consumer distribution, and holds a prominent position in South America.
  • Bunge recently unveiled plans for a merger with Glencore’s Viterra in a substantial deal valued at $8.2 billion, involving a combination of cash and stock.
  • Unfortunately for Bunge, farmers believe that the deal would reduce competition and eventually increase the cost of food.  The deal could face regulatory risks.
  • In addition to the merger announcement, Bunge also disclosed a $2 billion share repurchase program. The company plans to initiate this program in mid-2o24.

The acquisition of Viterra by Bunge is structured as a cash plus stock deal with Viterra shareholders receiving $2 billion in cash and 65.6 million shares of Bunge. Viterra shareholders would own 30% of the combined company on a fully diluted basis upon the close of the transaction, and approximately 33% after completion of the repurchase plan.

On June 14, 2023, Bunge announced a share repurchase program worth $2 billion, equivalent to approximately 14% of its market capitalization at the time of the announcement. The main objective of repurchasing its shares is to reduce the dilution from the Viterra deal. Bunge intends to commence repurchases as soon as practically possible and expects to complete the repurchase plan no later than 18 months post transaction close.

Capital Allocation:

During Q1 2023, Bunge allocated $173 million for sustaining capital expenditures and generated $758 million of free cash flow. While the company paid $94 million in common dividends, no share repurchases were conducted during the quarter.

Bunge-Cash flow chart

Source: Bunge Ltd.

The CEO of the company emphasized,

“As we have discussed previously, we have a balanced approach to capital allocation and share repurchases are absolutely a component of that mix. However, they have been on hold over the last 2 quarters as we’ve been actively engaged in a variety of discussions to expand our global platform, scale and core capabilities.”

Dividend History:

Bunge has demonstrated a consistent and gradual increase in its dividend payments. From 2013 to 2022, the company raised its annual dividend from $1.14 to $2.3. This represents a compound annual growth rate (CAGR) of approximately 6.32% over the past five years.

Although the forward dividend yield of 2.75% may not be particularly high or exciting, it is marginally higher than the sector median yield of 2.58%.

Bunge’s earnings per share (EPS) growth has been impressive with a CAGR of 90% over the last five years. This remarkable growth can be attributed to various factors, including robust demand for agricultural products, favorable pricing conditions, and operational efficiency improvements. With a low dividend payout ratio of less than 20%, Bunge retains flexibility to invest in growth initiatives or allocate capital back to shareholders through share repurchases.

Furthermore, it is noteworthy that Bunge has never reduced its dividend, indicating a commitment to maintaining consistent payouts to shareholders.

M&A at Bunge:

Despite operating in a low-margin industry, Bunge has made strategic investments to expand its presence in the agriculture market. A notable milestone was the acquisition of Ceval, the largest soy processor in Brazil, in 1997. This strategic move, combined with subsequent acquisitions and organic growth over the next seven years, propelled Bunge to become the leading soy processor in South America.

In 2017 and 2018, Bunge further strengthened its position by acquiring Loders Croklaan, a renowned player in the palm and tropical oils market.

More recently, in 2021, Bunge entered into a joint venture with Chevron, focusing on renewable fuel feedstocks. This partnership has opened up new revenue opportunities for farmers through sustainable crop rotation practices.

Bunge-Viterra Deal:

On June 13, 2023 , Bunge announced that it has entered into a merger agreement with Viterra.

Under the terms of the agreement, which was unanimously approved by the Boards of Directors of Bunge and Viterra, Viterra shareholders would receive approximately 65.6 million shares of Bunge stock, with an aggregate value of approximately $6.2 billion, and approximately $2.0 billion in cash, representing a consideration mix of approximately 75% Bunge stock and 25% cash. As part of the transaction, Bunge will assume $9.8 billion of Viterra debt.

Viterra, which is currently owned by Glencore Plc (GLNCY), operates a wide-ranging network of agricultural storage, processing, and transport assets across 37 countries. Over the past four decades, Viterra has evolved from a regional grain trading company to a global, integrated agriculture network, including oilseed crushing, grains and ingredients assets.

Diana Moss, president of the American Antitrust Institute, expressed her concerns about the deal and stated,

‘The Bunge-Viterra deal could leave farmers with fewer buyers competing for farmers’ grain sales, pushing down prices while the costs of risk management or trading services could go up. These developments would lead to higher food prices for consumers.”

Bunge will need to obtain regulatory approval for the Viterra deal in various international markets. Analysts suggest that Canada and Argentina could present significant challenges for the company in this regard.

Bunge and viterra - financial profile

Source: Bunge Ltd.

The anticipated timeline for the completion of the merger is during the middle of next year.

combination of Bunge and Viterra assets

Source: Bunge Ltd.

Q1 2023 Results:

The agribusiness sector had a decent start to the year; however, the company’s performance fell short compared to the exceptionally strong results achieved in the previous year.

  • In the first quarter, the company surpassed analyst expectations with earnings per share of $3.26, slightly higher than the projected $3.24.
  • Sales for the quarter amounted to $15.3 billion, surpassing estimates by $150 million. However, this figure was $500 million lower than the sales generated in the corresponding quarter of the previous year.
  • Adjusted core segment EBIT for the quarter was $756 million, a decrease from the $858 million reported in the same quarter last year.
  • Income tax expense increased to $183 million from $108 million in the prior year, primarily due to changes in geographic earnings mix and higher tax benefits in 2022.
  • At the end of the quarter, the company had $3.15 billion in cash and short-term investments. It is expected that a significant portion of this amount will be allocated toward debt repayment and increased working capital during the second quarter.

Bunge-earnings highlights

Source: Bunge Ltd.

Analyzing the company’s recent performance, it exceeded earnings estimates in seven out of the last eight quarters, and revenue estimates in six out of the last eight quarters.

Despite these achievements, the company’s overall performance has been lackluster, with its shares declining by 3.8% over the past year.

Bottom Line:

Bunge, being one of the largest and more conservative agriculture stocks, is still affected by concerns of an economic recession. As a seasonal business, its performance is subject to fluctuations based on crop harvest cycles.

The potential merger presents an opportunity for change. If the merger successfully navigates through the regulatory approval process and is completed, Bunge would undergo product, geographic, and business mix diversification. This diversification is expected to mitigate the impact of cyclicality and reduce the company’s reliance on specific seasonal factors. Should the merger proceed as planned, Bunge would likely transform into a more formidable company, making it an attractive prospect for investment.

Source: Bunge Ltd.

We would recommend monitoring the progress of the deal and its approval to see if the post-acquisition company is worth investing in.

Welcome to edition 64 of Buyback Wednesdays, a weekly series that tracks the top stock buyback announcements during the prior week. The companies in the list below are the ones that announced the most significant buybacks as a percentage of their market caps. They are not the largest buybacks in absolute dollar terms. A word of caution. Some of these companies could be low-volume small-cap or micro-cap stocks with a market cap below $2 billion.

Buyback activity saw a slight uptick with 15 new buyback announcements last week compared to 13 in the prior week.

Top 5 Stock Buyback Announcements 

1. Spectrum Brands Holdings, Inc. (SPB): $74.86

On June 20, 2023, the Board of Directors of this branded consumer products company authorized a new 1 billion share repurchase program, equal to around 32.6% of its market cap at announcement.

Market Cap: $3.07BAvg. Daily Volume (30 days): 529,953Revenue (TTM): $3.01B
Net Income Margin (TTM): -0.90%ROE (TTM): -10.86% Net Debt: $2.97B
P/E: N/AForward P/E: N/AEV/EBITDA (TTM): 44.17

2. Chimera Investment Corporation (CIM): $5.53

 On June 14, 2023, the Board of Directors of this real estate investment trust authorized an additional $250 million share repurchase program, equal to around 20% of its market cap at announcement.

Market Cap: $1.28BAvg. Daily Volume (30 days): 2,306,383Revenue (TTM): -$66.82M
Net Income Margin (TTM): N/AROE (TTM): -6.45% Net Debt: $10.53B
P/E: N/AForward P/E: 8.96P/AFFO: N/A

3. Bunge Limited (BG): $93.51

 On June 14, 2023, the Board of Directors of this agricultural and food company authorized a new $2 billion share repurchase program, equal to around 14% of its market cap at announcement.

Market Cap: $14.08BAvg. Daily Volume (30 days): 1,549,085Revenue (TTM): $66.68B
Net Income Margin (TTM): 2.33%ROE (TTM): 16.55% Net Debt: $3.47B
P/E: 9.49Forward P/E: 7.71EV/EBITDA (TTM): 6.23

4. Network-1 Technologies, Inc. (NTIP): $2.31

On June 14, 2023, the Board of Directors of this computer software company authorized an additional $5 million share repurchase program of the company’s Class A common stock, representing around 9.3% of its market cap at announcement.

Market Cap: $33.35MAvg. Daily Volume (30 days): 4,397Revenue (TTM): $537K
Net Income Margin (TTM): N/AROE (TTM): -2.96% Net Cash: $46.68M
P/E: N/AForward P/E: N/AEV/EBITDA (TTM): 4

5. GigaCloud Technology Inc. (GCT): $7.65

On June 14, 2023, the Board of Directors of this B2B e-commerce solutions provider approved a new $25 million share repurchase program, equal to around 8% of its market cap at announcement.

Market Cap: $311.69MAvg. Daily Volume (30 days): 2,642,846Revenue (TTM): $505.43M
Net Income Margin (TTM): 6.96%ROE (TTM): 20.58% Net Cash: $33.74M
P/E: 12.54Forward P/E: 6.79EV/EBITDA (TTM): 6.12

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