US agribusiness Archer Daniels Midland (ADM) has approached Bunge about a potential takeover, which could set up a bidding war with Swiss-based rival Glencore Plc. The takeover could combine two of the world's four largest grain trading houses. ADM's approach comes just months after commodities trader Glencore proposed a partnership with Bunge, setting the scene for a bidding war.

Large grain traders that make money by buying, selling, storing and shipping crops have struggled in recent years with global oversupplies. Thin margins have squeezed core commodity trading operations, including those of ADM, Bunge, Cargill and Louis Dreyfus Co, which together are known as the “ABCDs” and dominate the industry.

ADM is understood to have approached rival Bunge amid challenges in global grain trade mainly caused by oversupply.

This comes after Anglo-Swiss multinational Glencore made an “informal” approach sparking possible takeover speculation back in May last year.

However, despite Glencore confirming an approach was made by its non-consolidated agriculture joint venture GAL to Bunge regarding a “possible consensual business combination,” Bunge did not engage in business discussions and stressed its commitment “to continuing to execute its global agri-foods strategy and pursuing opportunities for driving growth and value creation.”

Bunge, which has a market capitalization of US$9.79 billion, closed up 11.4 percent at US$77.56 on Friday. ADM has a market cap of US$22.64 billion.

ADM said it does not comment on “rumors or speculation,” while Bunge did have not responded to requests for comment. Glencore was not immediately available for comment. The Wall Street Journalfirst reported on ADM’s interest in Bunge last Friday (January 19).

Grain companies in recent years have expanded into higher-margin sectors, such as food ingredients and aquaculture, to offset weak results and wild swings in their traditional business of handling crops.

In 2014, ADM bought natural ingredient company Wild Flavors for about US$3 billion in its biggest deal ever. The company has also expanded into handling healthy ingredients such as fruits, nuts and ancient grains.

“News of the ADM bid is a bit surprising given that ADM had been indicating the company’s strategic direction was more towards value-added rather the traditional commodities,” said Stephens Inc. analyst Farha Aslam.

ADM is the most US-focused of the major grain companies and a takeover would help it grow in South America, where Bunge is a major agricultural force.

Aslam estimated that fair value for Bunge in a takeover would be $90 to $95 per share, but Morningstar said the price could exceed $100.

Any tie-up would probably face stiff scrutiny from regulators and opposition from farmers who fear handing more market control to ADM could hurt wheat, corn and soybean prices.

The biggest overlap between ADM and Bunge in the United States is in grain origination and oilseeds processing, Aslam said. The companies would probably need to divest facilities in North America and also possibly in Europe, she added.

Aslam raised the possibility that ADM and Glencore could partner in a bid for Bunge to split up its operations.

“ADM would take the more value-added downstream businesses, and Glencore would own the more ag commodity businesses,” she said.

An ADM-Bunge merger would also face opposition from farmer groups in key agricultural markets, including the United States, European Union, China, India and Brazil, said Erik Gordon, a professor at the University of Michigan’s Ross School of Business.

The companies’ relatively late move into the big-agriculture merger game, behind DowDuPont, Nutrien Ltd. and others, would make gaining regulators’ approval even tougher, Gordon said.

“When you’re the first one, there’s still more competition,” he said. “Once they’ve let a few through, they may have second thoughts.”

Grain farmers need five or six active buyers to get fair prices for their goods, but there is already only a handful, said Peter Carstensen, who teaches law at the University of Wisconsin at Madison.

“This is the kind of transaction that will screw farmers,” he said.

Illinois farmer Dan Henebry, who delivers corn and soybeans to ADM’s North American headquarters in Decatur, Illinois, said he was worried a takeover of Bunge could lead grain handlers to pay farmers less for their crops.

“We’ve had so many mergers,” Henebry notes, “Less competition is not good.”