China's expansion into the global agribusiness market has taken a forward step after state-owned Cofco agreed to pay $1.5bn for a stake in a sugar, soyabean and wheat joint venture with Noble Group, one of Asia's biggest commodity houses.
The deal will also bolster Singapore-listed Noble's balance sheet at a time when investors have been fretting over the under-performance of its agriculture business, analysts said.
"[This] reduces the impact of what has been the worst performing/biggest earnings volatility [for Noble]," said Adrian Foulger, head of soft commodities research at Standard Chartered in Singapore.
Noble's shares were up almost 4 per cent that S$1.25 midday on Wednesday.
Under the deal, Cofco - or China National Cereals, Oil and Foodstuffs Corp - will take a 51 per cent stake in Noble Agri from Noble Group in an all-cash transaction. The deal values Noble Agri's equity at 1.15 times 2014 book value.
That matches the 1.15 times seen in the tender offer made last month by Temasek, Singapore's state investment company, for Noble rival Olam.
However, Mr Foulger said the Cofco/Noble valuation took account of the operational benefits that the Chinese company would bring to the business, while Temasek's was "purely a financial investment".
Frank Ning, Cofco chairman, said: "Noble Agri's supply chain management system and origination capabilities complement [our] logistics, processing, and distribution network in China.
"Incremental trade volumes from Cofco as a strategic investor will create significant synergy and value," he added.
Agriculture is the smallest part of Noble's business, accounting for 15 per cent of fourth-quarter sales in 2013. The rest comes from energy and metals trading.
Investors in Noble have nonetheless have been worried about the underperformance of the group's agricultural business due to overcapacity in Chinese soyabean crushing and sugar milling in Brazil.
That had led to some speculation that Noble might write down the value of some of those businesses.
"Selling something at a premium to the book value puts to bed that uncertainty," Mr Foulger said of the Cofco deal.
The joint venture will take on the $2.5bn of net debt held by Noble's agriculture business, halving Noble Group's total debt, which stood at $4.9bn at the end of December.
"Both parties will work together between signing and closing to refinance the existing debt of Noble Agri," said one person familiar with the deal.
Noble Agri will become the principal platform for Cofco to source commodities directly, rather than buying them from intermediaries, highlighting China's desire to get closer to the source of grains and other soft commodities to satisfy long-term growth in demand from its population.
Cofco would link that platform to its processing and distribution operations "to create a fully integrated value chain", it said.
The deal involves Noble's four sugar mills in Brazil, soyabean crushing plants in Argentina, Paraguay and Uruguay and grain silos in Ukraine, and Noble's network of ports and commodity terminals that are used to ship commodities to markets such as China.
Noble Group was advised by JPMorgan.
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