Chinese Secure Largest Foreign Takeover -- WSJ

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)