July 30,2009

Sinochem Continues China's Aussie Share Grab

By CT Johnson

Following uncomfortable questions from the Australia Securities Exchange on the reason for a sudden rise in Nufarm shares, China's Sinochem Corp issued a statement confirming that it's in early stage talks to acquire Australia's largest supplier of agricultural chemicals.  Eighteen months ago, China National Chemical Corporation, backed by Blackstone Group, backed out of a bid to buy Nufarm for A$3 billion without giving a reason.

"These discussions are at a preliminary stage and incomplete and there is absolutely no certainty that matters will progress," Sinochem, China's largest chemicals trader, said in a statement to Bloomberg.  "This is one of a range of potential growth opportunities that Sinochem is currently exploring."

Melbourne-based Nufarm is a global leader in the production and sale of herbicides with more than 2,100 products and sales in over 100 countries.  It is the eighth largest crop-protection company in the world.  The company has more than 2,500 employees worldwide, and 2008 sales of $1.7 billion.  Chief Executive Officer Doug Rathbone holds an 11% stake in the company, enough to block a takeover under Australian law.

The acquisition of Nufarm would extend Sinochem's operations into Australia, the Americas and Europe, as well as boost its share of the Chinese market for farm chemicals.  Sinochem's General Manager Liu Deshu said in March that the company is looking at overseas acquisitions to offset slowing domestic growth.

Sinochem has more than 200 branches and 30,000 employees worldwide.  "Sinochem is committed to expanding its business further internationally and is exploring opportunities in a number of geographies and related businesses," the company said.

The "potential acquisition of Nufarm, a global leading farm chemical supplier, could help Sinochem to fully utilize its domestic sales network and tap the nation's huge demand for farm chemicals," said Fang Lei, a chemical analyst with Shanghai's Industrial Securities Ltd.

At the same time, the market has been unimpressed with the proposed merger, with Nufarm's shares falling as much as 5.5% following Sinochem's confirmation of the ongoing talks.  Credit Suisse downgraded its position on Nufarm from "neutral" to "underperform," describing the bid by China's biggest fertilizer maker as "half-baked." 

"While strategically the merits of a takeover add up, we would consider the timing curious given the constant earnings downgrades and poor quality cash earnings. Corporate appeal seemingly once again coincides with lower potential earnings," the firm told Dow Jones. "Based on the share price appreciation and weaker fundamentals, we argue any takeover premium is seemingly already implicit in the share price at A$11.12 (Friday closing price)."

JPMorgan also raised the concern that the Sinochem bid might not materialize as expected.  "Considering we think the current share price is factoring in a takeover premium for a bid that has not been formalized yet, we will take a wait and see approach," the firm said.  It continued, "…there are still significant risks around this deal being formalized such as agreement on price and due diligence."

"There is some uncertainty about whether the takeover will get over the line," said Chris Weston of IG Markets in Melbourne. "The premium will have to be attractive."

JPMorgan Chase speculated in a note dated July 24 that Sinochem's bid might stimulate interest from other companies, namely Israel's Makhteshim Agan Industries Ltd., India's United Phosphorus Ltd. and Japan's Arysta Life Sciences. 

Nufarm has faced difficulties of late, having cut its profit guidance by between 10% and 15% on July 24, the second time in two months. 

China's chemical companies have been notable for their success in making overseas acquisitions.  Sinochem has a significant presence in the US, Europe, Asia, Africa and the Middle East.  China National Chemical Corp has assiduously internationalized its operations and has made successful acquisitions in France and Australia.

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