Recently word has been circulating that there may be a buyout offer for Archer Daniels Midland (ADM) in the not too distant future. Let look at the possibility and price.
Currently ADM has a market cap of $25 billion and annual sales of $40 billion. It is the one of the world’s largest processor of HFCS, ethanol, bio-diesel, cocoa and oil seeds. It does business in 35 countries and has over 26,000 employees. Shares currently trade at 15 times this years earnings and 14 times forward earnings. ADM has grown earning 21% in 2005, 40% in 2006 and should hit 21% in 2007 (year end June). After years of leaving analysts and Wall St. in the dark about earnings, former CEO G. Allen Andreas commented before he retired last fall that the current unprecedented expansion will “substantially add to earnings in 2008”. This is the first comments I have every heard an Andreas publicly mutter on earnings. Current CEO Patricia Woertz commented on the latest earnings call that she was “more enthusiastic about the future” of ADM than ever before.
That being said, if insiders are this optimistic at a company that has a storied history of playing it’s cards closer to it’s chest than la cosa nostra, one must imply from this that 2008 is shaping up to be a very good year. Current estimates have ADM increasing earning next year only 9% in part due to the rise in corn costs. Yet the empirical data coming out suggests that this, far from being an issue may actually lead to more profits. In the most recent call ADM said despite corn costs rising, corn processing earnings increased 15% . Other ethanol producers also experience similar results. Recently, Corn Products (CPO), who produces no ethanol, only HFCS and other corn products commented that they have easily been able to past cost increases along to end users. The reason? The economics of corn are such that end users of its byproducts have no substitute for them. When you consider that 500,000 extra tones of HFCS will be sold into Mexico annually beginning in the fall of 2007, you have this increased demand further pressuring prices upward. Corn processors are also in the unique position to be able to easily hedge against price spikes, further insulating them from their effects.
Production increases mean ADM will increase it’s ethanol production 50% by 2008, it biodiesel production will double and it will add substantial cocoa production in the US. HFCS production can be increased without the building of new facilities so the option to maximize anticipated demand increases is easily attainable.
Currently June options have speculators positioning themselves to pay $40 to acquire shares before June 16th with call options out numbering puts almost 4 to 1 clearly leading to an upward bias in shares. Currently ADM has an enterprise value of $30 billion or roughly $46 a share. With managements enthusiastic expectations for 2008, any offer to buy the company would have to be well in excess of that. More realistic earning estimates for next year that put eps growth in line with the 20% increases each of the past 3 years put 2008 share price at $44 at the low end of the PE scale. All this means shareholders should expect shares to trade in the lower 40’s for FY 2008 that begins in July 2007 and any buyout offer should be at a minimum a premium to that putting shares easily into the $50 range.
Will it happen? There would be immense pressure on new CEO Woertz not to do a deal and she will likely not want to go down as the one who “closed shop” so to speak on a 115 year history by selling out to private equity, or worse, an oil company. Insiders and shareholder have visions of ADM becoming the “Exxon of Biofuels” and a buyout would quell those dreams. The only offer that may receive support would be a management buyout that allowed current holders to retain ownership in a now private ADM with current management a vision. The Andreas family had led the company for generations and as large shareholders would lead a revolt against a buyout by another firm. This anticipated hostility to an offer means it will either be avoided, or, be one that it very hard for shareholders to resist.
Either way, through results or a buyout offer, shareholders stand to prosper.