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UPDATE 2--Armajaro selling loss-making commodity trade arm to Ecom

Marcy Nicholson
Monday, 11 Nov 2013 | 6:28 PM ET

* Armajaro was co-founded by Anthony "Chocofinger" Ward

* Ecom's roots go back 150 years to cotton trading

* After deal, Ecom will rival ADM, Cargill in cocoa

NEW YORK, Nov 11 (Reuters) - London-based Armajaro Holdings Ltd will sell its commodity trading arm to Swiss agricultural trader Ecom Agroindustrial Corp Ltd, creating one of the world's biggest physical cocoa and coffee dealers in the latest deal to roil this niche market.

The sale, announced in a statement from both companies on Monday, follows months of talks with several suitors and is the latest in a series of deals that are transforming the trade and processing of coffee, cocoa and sugar across the globe.

The agreement marks the end of a 15-year foray into physical trading by Armajaro co-founders and majority owners Richard Gower and Anthony Ward, who built the company into one of the world's biggest cocoa trading houses. Ward's bold deals in cocoa futures earned him the nickname "Chocofinger."

The trading business reported a $7.5 million loss and negative cash flow in its fiscal year to end-September 2012.

For family-owned Ecom, whose roots go back over 150 years to cotton trading in Spain, Armajaro Trading provides a vast global logistics and storage network, and increases its presence in capital-intensive and high-risk cocoa and coffee trading.

"It moves us further down the path of being the leading integrated soft-commodity company," Ecom Chief Executive Officer Andrew Halle said in the statement.

Combined with Armajaro, Ecom will compete with Archer Daniels Midland Co and Cargill Inc in cocoa trading, and privately held Neumann Kaffee Gruppe in coffee.

Ecom's deputy head of cocoa and coffee chief, Alain Poncelet, will become CEO of the new company, and Mark Dendle will be the chief financial officer. Both will retain existing roles within Ecom.

Gower and finance director David Tregar will remain as advisers to the company to provide support during the transition, the statement said.

News that Armajaro was looking to sell its physical trading arm was first reported by the Financial Times on Sunday. The terms were not disclosed.

The fate of a World Bank International Finance Corp (IFC) $55 million investment in Armajaro Trading last year was not clear, although sources said Ecom has a long-term relationship with the IFC.

CHALLENGING TIMES

Armajaro, which generated $3 billion in revenue last year, has faced challenges in the past year, with Gower forced to return as CEO following the abrupt departure of Andrew Stone in August after the company reported the full-year loss. It also started a review of some of its cocoa operations.

Even so, the company still had ambitions to diversify last year. It set up a sugar desk and was close to buying a mid-sized cotton merchant before pulling out of the deal in April.

Armajaro Holdings will continue to run its commodities focused hedge funds under Armajaro Asset Management LLP.

Ward, runs the CC+ cocoa and coffee fund, which was down 6 percent in the four months to April, according to an investor report seen by Reuters.

The CC+ fund reports on a quarterly basis to its investors with a three-month lag.

INDUSTRY UPHEAVEAL

The sale comes at a time of upheaval for softs merchants as coffee and sugar futures languish near multi-year lows, and many processors suffered squeezed cocoa margins after demand slowed.

"Margins have been crushed on the physical side, so I don't think anyone is really making a lot of money in cocoa these days," said one industry source.

The industry is also undergoing a period of rapid consolidation.

Swiss-based Barry Callebaut AG bought the cocoa business of Singapore's Petra Foods Ltd to create the world's biggest maker of industrial chocolate. ADM is in talks to sell its cocoa business to Cargill, and last month, top sugar merchant Bunge Ltd said it might sell its loss-making Brazilian sugar milling business.

Armajaro is light on processing assets compared with those deals, but Ecom will secure vast logistics expertise and relationships with farmers from West Africa to Southeast Asia to Peru. Armajaro operates in nearly 30 countries.

COTTON ROOTS

Ecom, which reported more than $4 billion in turnover last year, was founded by Jose Esteve in 1849 as a cotton trading firm during the nineteenth century textile boom.

Its first move to diversify came in the 1930s, when it opened a coffee operation, according to its website. The families of four brothers own 94 percent of the company.

Ecom ranks itself one of the top three coffee merchants, one of the world's largest coffee millers, and among the top five merchants in both cotton and cocoa.

In 2012, it bought 13 million 60-kg bags of coffee, the company said in a statement, equating to nearly 10 percent of global production in the 2011/12 crop year.

Ecom said it bought 7 percent of the world's cocoa in 2012 and places itself as one of the world's top 10 cocoa dealers, with a global grinding capacity of about 260,000 tonnes, a fraction of the nearly 4 million tonnes of beans processed in the 2012/13 crop year.