US agricultural commodities group Archer Daniels Midland (ADM) is to buy food flavours and specialty ingredients company Wild Flavours in an all-cash transaction valued at approximately €2.3bn.

What’s most interesting about the deal, which is the largest takeover ever by ADM, is that the acquisition further moves ADM into the high-margin, fast-growing, specialty ingredients business. This marks a new departure for the soft commodities operator as it seeks to diversify from grain processing and tap into the less volatile ingredients business.

ADM chair and chief executive officer Patricia Woertz said: “We don’t have a lot of other parts of the business that have the high-margin, low-volatility, high-growth markets that can be a growth engine”, adding that “the commodity business can have its ups and downs”.

The agricultural commodity processing giant will pay €2.3bn and assume approximately €0.1bn of net debt. It will combine Wild Flavours with its existing specialty ingredient business to create a unit with annual sales of about €1.8bn.

Wild Flavours is the world’s sixth-largest flavour provider. Its big competitors include major global flavour and ingredients companies such as the Kerry Group, Germany’s Symrise and Switzerland’s Givaudan.

The acquisition values Wild Flavors at 14 times the 2015 estimated earnings and shows that these businesses do not come cheap due to the sector’s high growth prospects and good margins.

ADM, which employs more than 31,000 people, can process more than 275,000 tonnes of commodities per day. In 2013, it had sales of €66bn and earnings of €1.5bn.

Since 2008, soft commodities have become increasingly volatile, with unpredictable returns creating high risk for major commodity processors such as ADM.

Although ADM’s transition from a bulk commodity trader to a specialist ingredients business is not guaranteed to succeed, it will allow it to diversify its portfolio and reduce its exposure and risk.

Downstream integration

This move is further evidence of supply chain integration in the flavour and fragrance segment, where major players are becoming embedded in sourcing and processing raw materials.

For major blue-chip manufacturers, security of supply is becoming increasingly important, and sometimes more important than price – which can be seen in the higher margins.

Anything that may disrupt supply for these business-to-business customers could be potentially damaging to brand equity and is avoided at all costs.

With ADM integrating both businesses, it effectively has control of the supply chain, which provides it with a major point of differentiation when talking to customers.