Commodity supplier Noble Group is on a roll. Its share price rose 5.8% last week – more than 4 times the benchmark STI’s 1.3 % gain over the same period. Notably, the stock jumped 11% in three days to finish at its highest close since 25 October 2012, last Thursday.
 
Noble’s recent momentum has come on the back of last Wednesday’s announcement that Cofco Corp., China’s largest grain trader, has agreed to buy 51% of its agricultural unit in a US$1.5bn deal cash deal.

Deal details
The purchase agreement by Cofco is done jointly with an international group led by a private equity fund Hopu Investment, set up by the chairman of Goldman Sachs’ Chinese securities venture.
 
According to the SGX announcement on 2 April, the initial payment of $1.5 billion by Cofco will be adjusted to equal 1.15 times of the audited book value for the 51% stake in Noble’s agricultural unit.
 
Noble expressed that the deal creates a venture that will be Cofco’s main base for sourcing food materials internationally. Such a deal is Cofco’s second in recent times after it announced that it was buying 51% of Dutch grain trader Nidera BV,a trader of grains and soybeans among other agricultural commodities and active in Brazil and Argentina,in February.
 
Such deals have been seen potentially giving China greater control over pricing on the world's grain markets as well as better access to major grain-growing regions
 
China’s sovereign fund, China Investment Corp is Noble’s second-largest shareholder with a 14.1% stake.

Sweet deal for Noble?
Noble’s agricultural unit is the smallest of its three units, and includes includes sugar mills in Brazil, grain elevators in Argentina, and oilseeds crushing plants in China, Ukraine, South Africa, and South America. Weighed down by low sugar prices and weak oilseeds crushing margins, the agribusiness unit booked an operating loss in 2013 which contributed to a 48% drop in Noble’s full year profit.
 
As at 31 December 2013, Noble’s agri unit had US$2.5 billion of debt and sales of approximately US$14.9 billion.
 
According to Bloomberg, the deal values Noble’s agricultural unit at more than double some market estimates and allows the company to take off its books its biggest drag on earnings.
 
Noble said that funds from the Cofco transaction are expected to be used to repay existing debt and for general corporate and working capital purposes. Cofco has a further option to increase its stake in the agribusiness by 10%, althought Noble’s own stake will not go below 39% in the event that the option is exercised.

Source: Macquarie Research - 7 Apr 2014