(Bloomberg) -- Louis Dreyfus Co. is finally at the end of its eight-month pursuit of Australia’s biggest cotton processor, securing victory in a bitter fight for control of the company that pitted the major trader against fellow behemoth Olam Agri Holdings Ltd.
The tussle for Namoi Cotton Ltd. drew a series of bids from two of the world’s biggest crop traders, often in quick succession, and prompted directors of the Australian company to flip their support as the offers got higher. At one point, Louis Dreyfus cried foul over Olam’s tactics with top shareholders, and the Namoi chairman had to convince regulators not to derail the process.
Namoi — which the winning bid valued at about A$160 million ($107 million) — will be a fraction of the Louis Dreyfus cotton empire that spans from Africa to the US, but it provides access to high-quality fiber near manufacturing hubs such as Bangladesh and Vietnam. It will also allow the trader to hedge against supply disruptions in the northern hemisphere.
For Olam, it was always going to be an uphill battle. Even before Louis Dreyfus lobbed its opening proposal in January, it held a 17% stake in Namoi, making it a costly exercise for any other company with sights on the cotton processor.
Olam did, however, force its rival to pay up — with a final bid 51% higher than the initial offer.
It’s a move to bolster “cotton-sourcing options in the Pan-Pacific region at a time when the cotton industry is undergoing significant changes,” said Robert Antoshak, a fiber and textile consultant who has spent over three decades in the industry. “Australian varieties can at times command a premium price.”
Rotterdam-based Louis Dreyfus declined to comment for this story, while Singapore-based Olam said the company was committed to Australia’s cotton industry with ongoing growth plans, without elaborating.
Survival Mode
Namoi started as a growers co-operative 62 years ago in the small rural town of Wee Waa in the state of New South Wales, and operates about a quarter of the nation’s processing plants, known as gins.
The processor initiated the takeover process about 18 months ago to safeguard its future, said Chairman Tim Watson. After clawing its way back from one of the worst droughts in history in 2018-19, management realized factors including a changing climate would likely continue to put the company at risk, he added.
Namoi shut five plants in the past two decades, according to Watson, and the recent drought made operating conditions difficult for the company. Namoi had to shuffle staff between sites and reduce electricity use to cut costs. Several plants didn’t process any cotton during that season, while others operated single shifts or five-day weeks.
“The best idea we came up with was to try and see if there was someone out there who would like to bolt Namoi onto it, a bigger company,” Watson said in an interview. “We’d looked at growth opportunities, but our balance sheet wasn’t really able to withstand a significant growth opportunity.”
Both Namoi suitors faced scrutiny from the Australian Consumer and Competition Commission, and Louis Dreyfus agreed to sell a stake in a cotton lint classing service and terminate a joint venture to allay concerns.
Watson told the regulators that without a deal, Namoi was likely to “die a slow death,” and continue closing plants. “At one stage, I thought they might block both deals,” he said.
Cotton Outlook
Cheaper synthetic options like polyester have eroded demand for natural fibers over the years. Benchmark cotton prices have tumbled almost 70% since a peak in 2011 — a surge underpinned by a manufacturing demand from China, just as many top exporters were hit by bad weather.
The global industry has seen broad consolidation over the past two decades, as waning demand for natural fibers and tightening profit margins made it harder for smaller players to compete.
Louis Dreyfus is now on the brink of securing the final outstanding Namoi shares — for more than double the stock’s value a year earlier. Its winning bid was 77 Australian cents (51 cents) a share.
The trader will add 10 processing plants to its Australian portfolio, bringing its total to 13. That will account for nearly a third of the country’s total and surpass the nine operated by Olam Agri’s Queensland Cotton unit.
--With assistance from Archie Hunter.
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