Glencore to buy Canada's largest grain handler

LONDON/WINNIPEG, Manitoba (Reuters) - Glencore , already the world's No. 1 commodities trader, has agreed to buy Canada's largest grain handler in a C$6.1 billion ($6.2 billion) deal that will shake up an industry that should flourish as global demand for food surges.

Glencore will acquire Viterra and then sell off some parts of the company to Canada's Richardson International and Agrium, a step that should allay concerns that Ottawa could block the deal on national sovereignty or competition grounds. Viterra also has significant assets in South Australia.

The acquisition gives Glencore - long a powerhouse in oil and metals - a huge new presence in grains, an area now dominated by Archer Daniels Midland , Cargill and Bunge .

The Swiss-based trader wants to round out its portfolio in anticipation of a coming squeeze on global supplies of grains as the populations of China, India and other emerging economies soars and diets improve. Canada and Australia are among the world's largest grain exporters.

"Canada as the second leg of the huge North American bread basket is going to be increasingly called upon to produce (crops) for the world," said Rich Feltes, vice-president of research at R.J. O'Brien in Chicago. "What seems to be a lot of money for this investment right now will over the long term, prove to yield handsome returns on the dollar."

The friendly deal, already endorsed by Viterra's board, requires shareholder approval and must pass regulator reviews in Canada and Australia. Glencore said it expects no problems and is already planning further expansion in North America.

Glencore, which is also in the throes of a $36 billion takeover of miner Xstrata , already markets and produces crops as well as metals, minerals and oil. It has earmarked agricultural commodities as an area for growth.

"This acquisition solidifies our place as one of the world's leading, integrated producers, processors and marketers of commodities," said Chris Mahoney, Glencore's head of agricultural products, during a conference call.

Glencore is offering C$16.25 for each Viterra share, a price that is in line with market expectations after days of speculation. The deal represents a 48 percent premium over Viterra's closing price on March 8, the day before it announced it had received expressions of interest.

To pay for the deal, Glencore will use existing cash resources and credit facilities, while lightening the burden by selling the majority of Viterra's Canadian assets and some others to closely held Richardson and Agrium for roughly C$2.6 billion in cash.

Shareholders accounting for 16.5 percent of Viterra's stock, including the company's largest investor, Alberta Investment Management Corp, have already pledged their support.

The rest of Viterra's investors will vote on the deal at a special meeting expected in May.

OTHERS INTERESTED IN VITERRA

A host of prospective buyers aggressively pursued Viterra for months, said Viterra CEO Mayo Schmidt. A rival bid could still surface, likely a hostile offer, but Schmidt downplayed that possibility.

"It would be my view that the process came to a conclusion with the best buyer of the assets emerging," Schmidt told reporters, adding that Viterra didn't solicit bids.

Archer Daniels Midland said on Tuesday that it was interested, but deemed the cost too high.

Viterra shares dipped 0.3 percent in Toronto, while Agrium stock climbed 2.3 percent with other fertilizer companies. Glencore shares in London slipped 1.8 percent.

Viterra will pay Glencore a C$185 million break fee if it accepts a better offer from another party, or if its board withdraws or modifies its recommendation.

Glencore would have to pay Viterra a C$50 million reverse break fee if the deal does not close for regulatory reasons.

Agrium will acquire the majority of Viterra's retail agri-products business, including its 34 percent stake in Canadian Fertilizer, for which it will pay C$1.8 billion. Richardson will acquire 23 percent of Viterra's grain-handling assets as well as certain processing assets in North America for C$800 million.

NO IMPACT ON XSTRATA DEAL SEEN

Analysts have said the deal is unlikely to disrupt Glencore's blockbuster tie-up with Xstrata - a prize that the trader has been working towards for years.

The Viterra acquisition instead reflects Glencore's opportunistic approach. The grain handler is poised to take advantage of the impending end of the Canadian Wheat Board's monopoly on marketing Western Canadian wheat and barley.

In Viterra, Glencore and partners will acquire the leading Canadian handler of spring wheat, canola, barley and oats.

Mahoney said the Viterra deal would have "no impact" on its plans for Xstrata.

"Grain trading is a reasonably small part of the (Glencore) business. It's an area where they probably want a larger market share -- and it's one of the areas of their trading business where they can grow," analyst Nik Stanojevic at Brewin Dolphin in London said. But Xstrata "is the one they have been trying to do for a long time now. ... They wouldn't jeopardize that."

Glencore's bid faces an automatic review by the Canadian government. Any proposed takeover of a large Canadian company by a foreign entity is subject to scrutiny under a law that requires it to carry a "net benefit" to the country. Canada's Competition Bureau will also review the deal.

In 2010, Ottawa blocked a hostile bid by Anglo-American miner BHP Billiton for Potash Corp, the world's largest fertilizer maker, stirring concern about whether the government would allow Viterra to fall under foreign control.

But Mahoney said he expected no snags with regulators in either Canada or Australia.

Glencore plans to consolidate Viterra's executive offices in Regina, Saskatchewan, which could sway the support of Saskatchewan Premier Brad Wall, who led opposition to the proposed Potash takeover.

COMPETITION CONCERNS

Mahoney also said that Glencore's global marketing and distribution reach would benefit Canadian farmers.

Helping allay anti-trust concerns, the Canadian grain-handling businesses of Glencore and Richardson would be roughly equal in size after the deal, he said.

Instead concern may focus on Agrium - already the biggest U.S. farm retailer of seed, chemical and fertilizer. It will take over Viterra's leading retail position in Canada.

Involving Canadian companies likely reduces the risk of Canada rejecting Glencore, said BMO Capital Markets analyst Kenneth Zaslow, in a note to clients.

Glencore describes itself as one of the leading exporters of grain from Europe, the former Soviet Union and Australia. It commanded almost 9 percent of the global market for grains at the time of its public share offering last May.

The company is already planning to expand its North American ag business, through acquisitions in the United States and organic growth in Canada, Mahoney said. But he refused to comment on potential interest in Gavilon Group, the U.S. energy and grains trader that is the other big agribusiness name in play.

Bank of America Merrill Lynch and RBC Capital Markets advised Glencore. Canaccord Genuity advised Viterra, and TD Securities worked for the company's board of directors.

(Reporting by Clara Ferreira-Marques and Victoria Howley in London; and Rod Nickel in Winnipeg, Manitoba; Editing by Frank McGurty)