Syngenta AG; market cap as of 12/02/2016: $37.43bn
China National Chemical Corporation; market cap as of 12/02/2016: N.A.

Introduction

On February 3, 2016, China National Chemical Corporation (ChemChina) and Syngenta AG (NYSE: SYT), a Swiss crop protection and crops producer, reached the acquisition agreement with the Board of Directors of Syngenta unanimously recommending the offer to the shareholders. The largest China’s outbound deal, valuing Syngenta at $43.8bn, represents an increasing desire of Chinese corporations to secure strategic assets in the time of economic slowdown and complements the series of cross-border acquisitions made by Chinese corporations. The deal would strengthen the agricultural portfolio of ChemChina and is considered to be vital for the food availability issues and country’s development. It will also enable Syngenta, faced with low crop prices and global currency turmoil, to continue its growth strategy and expand in emerging markets, particularly in China.

About China National Chemical Corporation

ChemChina is China’s largest state-owned chemical company with revenues of $45bn in 2015, which operates in six business sectors: new chemical materials and specialty chemicals, basic chemicals, agrochemicals, tire rubber, petrol processing and refinement, and chemical equipment. In agrochemical segment ChemChina represents the largest non-patented manufacturer of pesticides, which are chemical substances used as crop protection products. The segment receives substantial support from the plant growth regulators, as agricultural industry is crucial for the Chinese economy.

While ChemChina might not be as well recognized globally as other Chinese firms tapping into the overseas market, such as Alibaba, Lenovo or Huawei, company’s CEO Mr. Jianxin is said to be an experienced international acquirer. In fact, ChemChina has a track record of overseas deals, most notable of which include the acquisition of French Adisseo Group and Qenos Holding Limited in Australia in 2006, Rhodia Global Silicone in France in 2007, Norway’s Elkem and Israel’s MakhteshimAgan in 2011. In 2015 ChemChina continued to expand its presence abroad with the acquisition of world’s fifth largest tire manufacturer, Italy’s Pirelli, for $7.9bn that marked the return of China’s state-owned companies to global deal-making. ChemChina’s motivation to secure strategic assets and gain access to leading technologies has not changed ever since. In January 2016, ChemChina-led consortium agreed to acquire German industrial machinery maker, KraussMaffei Group, for $1bn. In the same month, the company also acquired a 12% stake in Mercuria Energy Trading, a Swiss commodity-trading house.

About Syngenta AG

Syngenta is a leading agricultural company, headquartered in Switzerland and operating in two main businesses: crops and crops protection, with sales of $13.4bn in 2015. The company was in talks with a publicly traded American multinational agrochemical corporation Monsanto (NYSE: MON) in June 2014, and a year later the latter approached Syngenta again, offering c. $486 per share in cash and stock on 8 May, 2015. Syngenta had been successfully withstanding this and all subsequently revised offers deeming the price as significantly undervaluing Syngenta’s technological capabilities and possible synergies, as well as being unsatisfied with the payment structure. Eventually, Monsanto had to walk away after its final bid of c. $502 per share in cash and stock on 24 August 2015, which represented a rumor date bid premium of c. 41% (based on Syngenta’s closing price on 21 August, 2015).

However, even though Syngenta successfully stood up to unsolicited tender offer, long pursued by Monsanto, it still had to face a lot of internal issues. Strong dollar, emerging market instability and low crop prices suppressed the performance of the company, driving the sales 11.4% down and operating income 12.5% down from 2014 level that made the company look for the new sources of growth and the ways to accelerate the implementation of its strategy.

Deal Structure

ChemChina agreed to buy Syngenta for a total equity value of more than $43bn in cash plus a special dividend of $5 per share that will be paid if the transaction finalizes. This is another incentive that ChemChina granted to the shareholders in order to achieve the acceptance of 67% of the shareholders that is needed. As the state ownership could not be compromised, the offer will be paid in cash that satisfies Syngenta’s shareholders. It is important to note that ChemChina’s ability to easily secure financing is related to its state ownership, which could be hindered should the company operate on a purely commercial basis, given that its total debt stands at 9.5x EBITDA.

The price tag seems to be pricey, as it represents a 22% premium on the day of the announcement, which spikes to 44% if the offer price is compared to the share price before the rumors about transaction started circulating. In addition, this perception is confirmed by transaction multiples, as ChemChina is paying 17x Syngenta’s trailing 12-month earnings, exceeding the multiples paid in 10 comparable deals, according to Bloomberg data. The relatively high price can also be explained by the presence of multiple bidders, as Syngenta was approached by Monsanto earlier last year. The deal is expected to be completed by the end of the year. Syngenta’s existing management will continue to run the company. After the closing, a ten-member Board of Directors will be chaired by Mr. Jianxin, Chairman of ChemChina, and will include four of the existing Syngenta Board members.

Rationale

Given that ChemChina is a state-owned company, company’s actions in the M&A market are not only driven by the willingness to increase profitability but are also strongly correlated with pursuing objectives of the state. On the one hand, Chinese population is dramatically increasing and is expected to rise even more given that the one-child policy was abandoned last year in favor of the two-child policy. On the other hand, the land available for agricultural purposes is declining because of the massive industrialization. In fact, China has more than 20% of the world’s population with less than 10% of the earth’s arable land. Therefore, the acquisition would boost the agricultural production especially due to Syngenta’s patents on genetically modified crops, that are currently prohibited in China but the government is considering a relaxation of the ban. ChemChina would also be able to further diversify its agribusiness portfolio and have access to farmers from Brazil to the UK in order to further increase the availability of food in case of need.

As for the board of Syngenta, they decided to accept the deal not only because the valuation seemed fair, but also because they were guaranteed that they would not be removed and the company would remain headquartered in Basel, Switzerland. The deal would allow Syngenta to enter new markets (the Chinese one) and to continue to be one of the largest agrochemical companies even after the Dow/DuPont combination.

Rise in Chinese Overseas Investment

China’s outbound foreign direct investment (OFDI) expanded significantly in the past decade. It started in the mid-2000s with the main focus on developing countries and a few resource-rich developed economies, such as Australia and Canada. However, the trend began to reverse towards 2008, when investments in most advanced economies increased sharply. According to the research firm Rhodium Group and the Berlin-based Mercator Institute for China Studies, China’s global stock of outbound foreign direct investment, which includes investing in corporate mergers, acquisitions and start-ups, will grow from $744bn to as much as $2tn by 2020.

The new momentum behind Chinese investment in developed countries is the result of the shift in the country’s growth model. In the past, growth within the country (in China) appeared to be much more attractive than overseas opportunities and outbound FDI was limited to securing natural resources and building the infrastructure needed to boost cross-border trade. Nowadays, Chinese firms are seeking to upgrade their technology, pursue higher levels of the value chain usually presented in foreign firms as well as augment managerial skills to remain globally competitive.

The growth of Chinese investment poses certain risks to foreign businesses, such as new competition at home and abroad, while at the same time it brings invaluable new opportunities, such as divestment of assets, co-investment, and new business in China.

Conclusions

This combination appears to be extremely satisfactory for ChemChina/Chinese government, as they will be able to better tackle one of their major problems. However, the potential benefits on the Swiss side of the transaction are not as clear, apart from the access to the new market. This might be the reason why they rejected several offers before accepting the final one, in which the price offered was too satisfying to be renounced. The big question mark is related to the regulatory hurdle: while the ban on genetically modified crops should not be a big concern, the transaction still has to be authorized by the US Committee on Foreign Investment in the US, which has to check whether the deal would compromise American food security. This last concern has been reflected in the market reaction: the share price of Syngenta now (12/02/16) trades at $402.7 against the offer price of $491.8.

Financial Advisors

Dyalco, JPMorgan Chase & Co., Goldman Sachs Group Inc. and UBS Group AG served as financial advisors to Syngenta on the transaction while HSBC Holdings Plc and China Citic Bank International Ltd. advised ChemChina.

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