The merger of two leading producers of modified food starches, a staple ingredient of nearly every processed food product, is being investigated by antitrust enforcers at the Department of Justice.
Ingredion Inc. (INGR) - Get Ingredion Incorporated Report and Penford Corp. (PENX) said Monday the DOJ has issued a second request for information regarding their $340 million deal, which was announced Oct. 15.
The companies are among six of the major global players in the modified starch business. The others are Cargill Inc., Archer Daniels Midland Co. (ADM) - Get Archer-Daniels-Midland Company Report , Tate & Lyle plc and Roquette Frères SA. Ingredion, Penford, Cargil and ADM are U.S.-based. Tate & Lyle and Roquette are based in the U.K. and France, respectively, although both have operations in the U.S.
The starch industry is highly competitive and the primary products are essentially commodities that are viewed as interchangeable from one manufacturer to another. Customers for the products include manufacturers of food and beverages, brewing, pharmaceuticals, animal nutrition and paper and corrugated products.
In fact, companies in the business compete so directly that Ingredion has included noncompete clauses in the employment contracts of Chairman and CEO Ilene Gordon and other top executives.
Despite the intense competition, the companies and their lawyers during merger negotiations considered the possibility that antitrust officials would require divestitures. On October 6 the parties discussed whether the merger agreement should include a requirement that Ingredion divest assets or otherwise agree to any business restrictions in the context of antitrust approvals. The topic was addressed again three days later. Ultimately, the parties concluded that all necessary regulatory approvals could be obtained without the imposition of unacceptable conditions. However, Ingredion secured language that shielded it from any obligation to divest its assets or to agree to any conditions affecting its operations or to defend against a DOJ lawsuit challenging the merger. It also is not required to divest any Penford asset if the spinoff would "materially diminish the expected benefits of the transaction."
The agreement does not carve out any specific assets that Ingredion must be willing to divest nor is Penford entitled to a reverse termination fee if the deal is called off because of antitrust considerations.
The parties filed their merger application with U.S. antitrust officials on Oct. 27. Ingredion subsequently withdrew its notification on Nov. 25 and refiled it on Nov. 26. Pulling and refiling merger notification documents is a standard tactic when parties are trying to avoid a more burdensome second request. Nevertheless the DOJ issued its request for additional information on Dec. 24.
Ingredion is represented before the DOJ by Sidley Austin LLP antitrust partner David Giardina.
Ingredion is known primarily for producing corn syrup and corn starch whereas Penford is known for potato-derived products. However, both companies are investing heavily in new products aimed at the growing market for more nutritious, gluten-free and sustainably produced ingredients.
"This will nicely round out our product portfolio with complementary specialty ingredient solutions," Gordon told analysts during the company's third quarter earnings call on Oct. 30. "Additionally, it builds our presence in nature-based hydrocolloid ingredients and brings other capabilities which will enhance our efforts to delivering new ingredient solutions to the marketplace."
Hydrocolloids are essentially gums and include additives such as gelatin, agar, pectin, xanthan and carrageenan.
Gordon said the deal also will produce at least $20 million in annual synergies, primarily from eliminating redundant public company costs, procurement and supply chain efficiencies and savings and other general and administrative areas. "There is a real opportunity to drive operating and supply chain efficiencies as we leverage the combined manufacturing network in the U.S.," she said.
The starch industry is growing rapidly because rising disposable incomes globally are creating demand for more processed foods and other products and because of technological developments in the business.
In foods and beverages starch derivatives are used as texture agents and stabilizers. For instance, they are used as thickeners in yogurts and soups. Cracker makers use them to control the crunchiness of their products. They also allow vitamin C to be added to beverages without having it clump at the bottom of the bottle.
They also are used as tablet binders in pharmaceuticals, as emulsifiers in cosmetics and fiber additives in animal feed. In other products they provide PH and acidic stability, adhesiveness and film-forming properties.
The starch business is expected to grow worldwide at a rate of 6.2% annually over the next seven years to $58.2 billion by 2019.
The major players are developing specialty starches because of the growing consumer demand that food and beverage companies reformulate products to address concerns about obesity, nutrition and labeling. They also offer higher margins.
Already specialty products account for 15% of Ingredion's sales, according to a report issued by Credit Suisse analyst Robert Moskow when he initiated coverage of the company in April. Specialty starches are growing at double-digit rates and have high barriers to entry because of the capital investment and R&D required.
"The consumer trends are really growing in the area of gluten-free to non-GMO, the whole area of texture and sustainability," said Ingredion's Gordon, noting that Penford has extensive capability in R&D and product development. "So for us it was a great opportunity to expand our portfolio of high-value specialty products. And then having the manufacturing capability along with that and the ability to formulate really made it very timely."
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