April 7, 2016

Commodity trader Glencore has confirmed that it has agreed to sell a 40% stake in its agriculture business to Canada’s largest pension fund, Canada Pension Plan Investment Board (CPPIB), for $2.5 billion. The sale comes as declining commodity prices have taken a toll on the trader and the funds raised from the sale will be used toward reducing its $30 billion in debt.

Originally published April 6, 2016

CPPIB in Advanced Talks to Buy 40% Stake in Glencore Ag Business

Canada’s largest pension fund, Canada Pension Plan Investment Board (CPPIB), is in advanced talks with Glencore for the acquisition of a 40% stake in Glencore’s agriculture business for $2.4 billion, according to unnamed sources, reports the Wall Street Journal. A deal is expected to be announced within days, and if successful, the transaction would value Glencore’s entire business at approximately US$6 billion.

Bloomberg reports that the deal is part of a strategic debt cutting scheme on the part of Glencore in response to falling commodity prices, which was announced by chief executive officer, Ivan Glasenberg last September. The company had made it known that it intended to reduce its debt load to $18 billion. However, after announcing last month that the group’s annual profits plummeted by 69% and its adjusted earnings before interest and taxes fell 47% to $524 million last year, the group is now targeting a reduction of its debt to $17 billion and is looking to sell $5 billion worth of assets.

This deal would, in effect, partially reconcile Glencore’s $6 billion acquisition of the Canadian grain trader, Viterra Inc. in 2012 – which the group pursued with the belief that China and other emerging markets would consistently drive food demand and support market prices. However, economic slow downs in both China and Brazil have been contributing factors to multi-year low global commodity prices, according to Morningstar.

CPPIB stepped into agricultural investments in 2012, building a portfolio of farmland in Canada, the U.S., Australia, New Zealand and Brazil worth C$787 million today, according to the latest annual report issued by the fund.

In total, CPPIB oversees assets under management valued at C$282.6 billion, and due to the long-term structure of its investment strategy, the fund is well positioned to acquire a stake in Glencore at a market low, and hold it in anticipation for a market rebound.  In addition, the stake would work to diversify CPPIB’s assets, while providing needed cash and mitigating volatility, according to Morningstar.