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Breakingviews - Louis Dreyfus’ Gulf deal makes future less fraught

A French farmer harvests his field of wheat in Haynecourt, northern France, July 19, 2020.

LONDON (Reuters Breakingviews) - Louis Dreyfus Company is breaking the habit of a 169-year lifetime. The commodities trader, held in the eponymous family since 1851, on Wednesday said it was selling a 45% stake to ADQ, one of Abu Dhabi’s less familiar wealth funds, for an undisclosed sum. It should make managing the company a fair bit less fraught.

LDC has had three related problems in recent years. One was a prolonged period of oversupplied grain markets and lowball prices. Another was a lack of readily available cash to spend pivoting to higher-margin business lines like more niche commodities. Finally, owner Margarita Louis-Dreyfus, whose family trust holds 96% of the holding company that controls 95% of LDC, was taking a lot of money out of the business to finance the buying-out of other shareholders.

In the first half of 2019, for example, LDC only made $304 million in cash from operations, but paid itself $428 million in dividends. Only $302 million went out in the first half of 2020. But net debt still hovered around 3 times EBITDA.

Selling out to Abu Dhabi eases the pressure on a series of levels. Of the funds, at least $800 million of cash will go to reduce net debt closer to 2 times EBITDA, and still provide extra resources for investment. Crown Prince Mohammed bin Zayed al-Nahyan’s deep pockets will stop Louis Dreyfus seeming like a poor relation of Archer-Daniels-Midland, Bunge and Cargill. And Abu Dhabi’s presence should lead to a more measured dividend strategy.

It’s also a better time than most recent years to sell. Covid-19 has prompted countries around the world to stockpile grain and other essentials, rather than rely on “just-in-time” supply chains. That has helped prices improve. Rivals ADM and Bunge, which are both listed, have seen their share prices recover above March lows.

The chance to secure food supplies means “MBZ” won’t especially care about valuation multiples. But Louis Dreyfus Company made $285 million in net profit in the last year, and on ADM’s 15 times earnings multiple, that could have justified an equity valuation over $4 billion. Abu Dhabi’s acquisition valuation may have been lower, but even selling out for less would have been worth it for LDC’s new-found stability.

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