Commodity trading giants get in cotton M&A spin

Cottoning on. Olam and Louis Dreyfus are picking another M&A fight over fibre. On Thursday, the Singapore-listed group's majority-owned Olam Agri lobbed in an A$122 million ($80 million) offer for Namoi Cotton's equity, higher than the $70 million its privately held rival agreed to pay for the Australian target in January. The standoff in this tiny deal is shaping up to be a repeat of the 2007 battle between the two commodity trading giants.

Louis Dreyfus lost that one, despite its ownership being just shy of 20% of the prize, Queensland Cotton. Now it looks on the back foot again. Louis Dreyfus owns 17% of Namoi, having bought a stake as part of a deal struck a decade ago to establish a lint marketing and warehousing joint venture. But it's not the largest shareholder; Samuel Terry Asset Management is, with a roughly 23% holding, and it says it will back the highest bidder – currently Olam.

Granted, the European behemoth run by Michael Gelchie has the right to match any new offer. But thanks to its victory in the takeover battle 17 years ago, Olam, helmed by Sunny Verghese, should be able to cut more costs by stitching the two Australian operations together, giving it more financial wriggle room should it need to boost its bid.

Both suitors might keep spinning out a higher price. One big question is whether Namoi's earnings are sustainable. Australia's cotton belt is prone to long bouts of water scarcity, with the 2018-2019 drought reducing by up to 90% the amount of fibre the company processed. Climate change is likely to make such events harsher and more frequent. That warrants some financial caution from the bidders as they renew their cotton war.

(Article co-authored by Antony Currie)