Despite opposition from competitors and watchdog groups because of the milling colossus it would create, the Justice Department last week signed off on the $4 billion flour milling merger of ConAgra (NYSE:CAG), Cargill, and CHS (NASDAQ:CHSCP). The new miller expects to be operational this week.
The merger was originally announced in March 2013 and was expected to have closed late last year, but ConAgra was forced to push back the completion date as antitrust regulators eyeballed the impact it would have on pricing. Horizon Milling, currently the largest flour miller, is a joint venture owned 76% by Cargill and 24% by CHS, and would join the 21 mills ConAgra operates. The rechristened Ardent Mills would have combined sales of $4.3 billion, operate 44 flour mills, three bakery mix plants, and a specialty bakery facility across the U.S., Canada, and Puerto Rico, and control.
To help grease the skids for approval, ConAgra agreed to sell to the U.S. subsidiary of Japan's Nisshin Flour Milling four of those mills for $215 million, a move that apparently worked as the regulatory agency finally stamped it with its imprimatur. Sort of.
In approving the transaction, the Justice Department also moved to block it, announcing it filed a civil antitrust lawsuit to force the grain processors to move forward with the sale of the four mills. It agreed with opponents who said the transaction as originally constructed would cause hard wheat flour prices to rise in northern and southern California, as well as in northern Texas and the upper Midwest, while also making soft wheat flour in southern California and northern Texas more expensive. If the mills are divested as proposed, then theoretically at least the merger would "create a substantial, independent and economically viable competitor" in California, Minnesota, and Texas.
The biggest loser will be grain processor Archer Daniels Midland (NYSE:ADM), which remains the second-largest miller in the country, but will now be dwarfed by the leader that will command more than a third of the market. Coupled with troubles ADM is facing in its core grain merchandising and handling operations due to severe winter weather and China's rejection of GMO-tainted corn, the grain processor will be hard-pressed to defend itself against this new, bigger rival.
The milling industry itself is consolidating down to a point that further mergers will likely become even rarer. Once it completes its own acquisition of Cereal Food Processors that it announced in March, Milner Milling will be the third-biggest miller, though even more distantly behind its rivals. Miller Milling, which is buying the four orphan flour mills from ConAgra, will be fourth. With such concentration in the hands of so few companies, the likelihood any but the smallest would be able to arrange a deal is doubtful.
With regulatory opposition removed, however, it looks like this miller is about to grind down its rivals along with the wheat.
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