Orient Capital Research
Hong Kong, October 17, 2016
China Chem & Syngenta
In August, the U.S. approved China National Chemical Corp.’s proposed $43 billion takeover of Swiss seed company Syngenta AG, overcoming domestic opposition on security grounds. Given the history of Chinese foreign acquisitions, one of the concerns remains the ability of ChemChina to raise the funds for the proposed purchase. In this note, we analyze several sources of capital and the political implications of the financing behind the deal.
1. Chinese Merger Examples. One of the plans under discussion is that China Chem, Sino Chem and an unknown third party will together invest in an initial SPV (Special Purpose Vehicle) for China Chem’s acquisition of Syngenta with an estimated total amount of US$15bn. Although both companies — along their subsidiaries — denied this speculation, the market believes this deal is a replay of the merger between CNR and China South Locomotive as well as China COSCO and China Shipping Group. These, however, were domestic, not international, mergers.
2. Equity Financing from a Government Fund. There is also speculation that China Chem is also considering a new financing structure (equity financing). The major source will be provided by SASAC (State owned Assets Supervision and Administration Commission, which controls state firms) and the government-funded Silk Road fund for US$10bn.
3. Possible All Cash Offer. Some analysts think ChinaChem will first do some restructuring to lower the leverage given a high debt ratio of 80%. By the end of 1H16, ChinaChem had a total debt over Rmb300bn. The acquisition (US$43bn) of Syngenta would also feature significant leverage, including a three-layer financing structure, with Chinese and international components, including six SVPs. However, bankers in China claim that China Chem has already clarified the source of capital for this acquisition in its tender offer: “This is a cash offer and has nothing to do with China Chem and its subsidiaries’ financials,” one banker told us.
4. Anti-Monopoly Investigation. The U.S. CFIUS approval may need to be revisited due to a potential cooperation between ChinaChem and SinoChem. According to one Chinese mergers lawyer, “If the integration between ChinaChem and Sino Chem started before the acquisition, the recently approved anti-monopoly investigation may need to be redone, given the changes that happened in the agreement. It will be harder to get approval by CFIUS this time as the agrochemical and chemical businesses of SinoChem will be included this time. Before, China Chem and Syngenta have few overlapping in terms of agrochemical and seed businesses.”
5. Anti-Gene Transplant Sentiment Within China. ChinaChem’s acquisition of Syngenta was delayed for the third time, mainly due to Syngenta’s transgenic technology. From the very beginning, the former head of the State Ministry of Chemical Industry and an additional 400 people petitioned against the acquisition. According to the media, this number has grown to more than 1,300.
6. Preferred Stock is One Option. Since 2006, ChinaChem has conducted a few overseas acquisitions, which almost eliminated its cashflow. This time, ChinaChem plans to sell preferred stock and bonds to raise money. According to CITIC bank, the first-layer capital raising of US$12.7bn was successfully completed in June, 20% more than expected. However, CITIC bank has been silent regarding the second-round financing. Someone familiar with the acquisition told media that ChinaChem was going to sell the preferred stock in one of its units in exchange for US$10bn, of which half of the preferred stock would be convertibles. The remainder consist of bank loans
7.Strong Government Support. From a strategic viewpoint, it is highly likely the government will support this acquisition because in the long run it will improve China’s current agricultural technology in a meaningful way. In addition, the market expects that the Chinese government might start a new round of industry consolidation upon the completion of this acquisition.
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