By Brian Spegele in Beijing and Kane Wu in Hong Kong
China Inc. reached a new milestone in global acquisitions as
shareholders of agro-giant Syngenta AG approved a $43 billion
takeover by China National Chemical Corp., sealing the country's
biggest foreign deal to date.
The hard work may just be beginning, however, as China National
Chemical, known as ChemChina, faces a series of challenges ranging
from financing the deal to fusing the Swiss company into its own
operations.
"Life begins after closing," said Grace Fan-Delatour, a partner
at law firm K&L Gates LLP, who advises state-owned Chinese
companies on outbound investment and how to avoid the pitfalls that
often bedevil big takeovers.
ChemChina executives will have to manage a balancing act as they
look to expand Syngenta's seed and pesticide businesses in China's
fragmented and inefficient agriculture sector while ensuring
stability at the Swiss company's operations in the U.S. and around
the world.
At the same time, state-owned ChemChina must attract new equity
investment to help cover Syngenta's hefty price tag amid concerns
over its debt levels.
Finally, more upheaval may be on the way: China's government is
contemplating a merger of ChemChina with state-owned conglomerate
Sinochem Group, according to two people familiar with the
situation.
Both companies have previously denied reports of a planned
tie-up. They didn't respond to requests for comment Friday, nor did
China's State-owned Assets Supervision and Administration
Commission, which is in charge of state-run companies.
In a joint statement, ChemChina and Syngenta on Friday said
80.7% of the Swiss company's shares were tendered for the deal,
based on a preliminary count, well above the 67% minimum needed for
approval. The companies said the first settlement payment was
scheduled for May 18, when ChemChina would take control.
Syngenta closed at 459.2 Swiss francs ($465) a share Thursday,
about 20% above the price before the deal was announced in February
2016. ChemChina will also pay a special dividend of five Swiss
francs a share immediately before the deal's closing.
As the deal's completion nears, China has signaled it remains
willing to spend top dollar for prized overseas assets despite its
concerns over capital outflows that are tamping down its overall
global deals activity.
The transaction also portends a profound shift in the
agriculture sector globally, with China set to play a greater role
in U.S. and other countries' food supplies as it scoops up
technologies for its own farms. It also comes against the backdrop
of broad industry consolidation, which has triggered objections
from farmers over less choice and potentially higher prices.
At its heart, however, the deal will help China modernize
antiquated farming techniques that have made it increasingly
reliant on imports to feed its population of 1.4 billion. Granting
farmers access to more-advanced foreign technology -- including
genetically modified seeds developed by Syngenta and its
competitors -- is likely to be part of overhauls that aim to
industrialize farming in China.
With few exceptions, genetically modified seeds aren't allowed
in China. Industry observers say this deal is likely to help change
that over the coming years.
For Ren Jianxin, ChemChina's chairman and founder, the
acquisition solidifies his place as one of China's top deal makers,
coming after a series of transactions including the takeover of
Italian tire producer Pirelli & C. SpA.
However, ChemChina might face further hurdles after its latest
deal closes. Syngenta's net profit has fallen more than 25% over
the past two years. The company has struggled with poor weather,
exchange-rate volatility and deflationary forces that weakened crop
prices -- and reduced demand for its products.
"Syngenta was always, dare I say, viewed as the ugly stepchild
of the industry," said Tyler Tebbs, an analyst who has followed the
deal at brokerage firm Olivetree Financial Ltd.
While Mr. Ren has long been regarded as an aggressive
mergers-and-acquisitions tactician, he is seen as less adept at
staging a corporate turnaround. Success then may depend in part on
selecting key ChemChina managers to lead the integration, industry
analysts said.
Syngenta, for its part, has suggested ChemChina might take a
hands-off approach to its operations, and has played up the
expected long-term financial stability the takeover would bring to
the company.
"Syngenta will stay Syngenta," Chief Executive Erik Fyrwald said
in an interview after the release of the company's results on April
24, when it reported sales last quarter fell 1% from one year
earlier, to $3.7 billion.
One main benefit, he said, was having a long-term oriented owner
at a time when research-and-development cycles for crop-related
investments can last up to 10 years, which shareholders with a
shorter-term focus "often don't have the patience for."
The political and strategic considerations help to explain why
this transaction has been greenlighted by China's government while
other recent deals have sputtered amid tightened capital
controls.
"The reality is this: When China wants to do a deal, it will get
the deal done," said Hilary Lau, a partner who advises on Chinese
deals for Herbert Smith Freehills LLP. Policy-driven deals "remain
to be done regardless of the price tag."
The acquisition has been approved by regulators in the U.S.,
European Union, China and Mexico, among others. In India, a
government spokesman Friday declined to comment on the status of
approval there.
To win approval from the EU, ChemChina agreed to divest itself
of a large part of its European business for pesticides and other
products that regulate crop growth.
To pay for the deal, ChemChina obtained $50 billion in
short-term loan facilities last year, according to U.S. securities
filings by Syngenta. China Citic Bank International agreed to put
up $30 billion, while HSBC, together with three other European
lenders, agreed to provide $20 billion, according to the
filings.
The M&A streak by ChemChina has led to warnings from
credit-rating firms. Moody's Investors Service said in November it
expected the acquisition of Syngenta to result in a pro forma ratio
of debt to earnings before interest, tax, depreciation and
amortization -- an important indicator of a company's debt risk --
of about 11.4 times, up from 8.6 times at the end of 2015. An
investment-grade company's ratio is typically under three times,
according to credit analysts.
Seeking to limit its exposure, ChemChina began reaching out last
year to state funds, including China Reform Holdings, and the
country's $40 billion Silk Road Fund, for equity investment, people
familiar with the matter said previously. It also sought out
private-equity firms and sovereign funds, these people said.
So far, the company has garnered a $5 billion equity investment
from an arm of Citic Ltd., an affiliate to its financial adviser
China Citic Bank.
--Brian Blackstone in Zurich and Vibhuti Agarwal in New Delhi
contributed to this article
Write to Brian Spegele at brian.spegele@wsj.com and Kane Wu at
kane.wu@wsj.com
(END) Dow Jones Newswires
May 06, 2017 02:47 ET (06:47 GMT)
Copyright (c) 2017 Dow Jones & Company, Inc.
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