Glencore confirms sale of stake in agriculture unit for $2.5bn

Glencore has confirmed it has agreed to sell 40% of its agriculture commodities business to the Canada Pension Plan Investment Board (CPPIB) for $2.5bn (£1.8bn) cash, potentially followed by a further sale of 20% more in the long-term.

The deal, which values Glencore Agri at $6.25bn, which is towards the bottom of analyst expectations, is expected to close in the second half of 2016 with the FTSE 100 using the proceeds to pay down debt.

Glencore and CPPIB have also agreed to an initial four year lock-up period subject to a carve-out for Glencore to sell up to a further 20% stake.

Both parties may also call for an initial public offering of Glencore Agri after eight years from the date of closing, subject to a right of first refusal.

On closing, the Agri business, which last year saw EBITDA fall 39% to $734m, will be governed by its own board of directors, with CPPIB having the right to appoint two directors to its board alongside two Glencore-appointed directors and the unit's CEO, Chris Mahoney.

The Switzerland-based commodities giant acquired Canada's Viterra Inc for CAD6.1bn ($6.15bn) in 2012, amid its attempts to merge with Xstrata.

"We are pleased to be partnering with CPPIB as we embark on the next stage of the development of Glencore Agri," said group chief executive Ivan Glasenberg, who had increased his target for disposals to $4-5bn at February's results, including a stake in this business and one or both of the copper assets up for sale.

"Under Glencore's ownership the business has been successfully rebased, particularly following the Viterra acquisition in 2012 and is well-positioned to benefit from long-term global macro and sector trends," he added. "CPPIB have a proven track record in the sector and share our vision for the future growth of the business through value-creating organic and inorganic growth opportunities for the benefit of all stakeholders."

Glencore Agri had long-term debt of $0.6bn at year-end and working capital net of cash of $3.0bn which it said it intended to finance with short term debt on closing. It had gross assets of $10.2bn at year-end.

Analysts at Investec said valuing the business at $6.25bn suggested an EBITDA multiple of 8.5 times 2015 earnings, "which is a sizeable multiple".

But prior to the end of the previous financial year the broker noted there had been speculation of selling the business on a 10x multiple of 2014 EBITDA implying a US$10-12bn valuation.

RBC Capital Markets said that although the sale price is "unlikely to meet more aggressive market estimates", it had been expecting a 33% sale and on the whole viewed the sale as "a positive for the equity" for the deleveraging and that it ties in Glencore strategically with the CPPIB and "will likely see a return to growth in this business sooner than previous expectations".