Two months after ChemChina agreed its record-breaking takeover of Syngenta many analysts remain skeptical that the deal has the legs to overcome regulatory hurdles and be completed by the end of the year. Syngenta CEO John Ramsay is adamant that the deal is still on track, but a recent report by CLSA puts the chance of deal completion at 35% and Syngenta’s stock continues to trade below the offer price, suggesting deep-rooted investor uncertainty. But what’s the story behind such dry figures?
ChemChina, a state-owned enterprise (SOE), secured China’s largest ever acquisition of a foreign company when it bested Monsanto’s cash and stock offer for Syngenta with an all-cash offer of nearly $44 billion. However, by accepting ChemChina’s offer, Syngenta set themselves up for scrutiny as US lawmakers have called on the Committee on Foreign Investment in the United States (CFIUS) to look into the deal. CFIUS is an interagency committee wit the power to review foreign acquisitions of American companies where there is a concern that US national security could be compromised. In 2010, CFIUS ordered Huawei Technologies to divest from 3Leaf, a software company whose intellectual property had been purchased by the Chinese firm, and again in 2012 Chinese-owned company Ralls was ordered to pull its investment from four wind farms in Oregon which were located near a US Navy training facility. Any such investigation into ChemChina would be tasked with looking into a broad range of concerns, from the transfer of sensitive intellectual property to fears that, in the wrong hands, GMO technology could be weaponized and used to threaten US food stocks.
If the ChemChina acquisition fails the CFIUS test, not only would it be the first time that a merger was blocked on the grounds of food security but it would come as a significant blow to both parties for whom much hinges on the deal, but for very different reasons.
Syngenta is being forced to make savings of up to $1 billion dollars by the end of 2016 to recoup losses from weak sales, which have been hit, by currency volatility, low commodity prices, unfavorable weather and tight credit conditions. Other agro-chemical firms facing the same headwinds have responded by consolidating, as in the case of the $130 billion merger between Dow Chemicals and Dupont in 2015. For Syngenta, the acquisition by ChemChina is meant to provide a similar life raft in the choppy waters of the global economy.
For ChemChina, and by extension for the Chinese government, the deal is about acquiring the means to feed its growing population while being faced with diminishing arable land. Indeed, over the past two decades China’s industries have been voraciously consuming natural resources to keep the economy powering ahead. Mega-dam projects, mining and urban development have all eaten into China’s farmland. Between 2000 and 2008 an area the size of Belgium and the Netherlands was lost to factories so that now China has just 0.09 hectares of arable land per person, which is less than half the global average and one-sixth that of the US. Moreover, one-fifth of what little farmland China has left is heavily polluted by industry. Acquiring a seed giant like Syngenta would mean access to decades of research into the GMOs that China may need to feed itself in the near future as its fertile land continues to dwindle. All this despite a strong aversion among the Chinese public against GMOs, an aversion that, ironically, was fostered by the government who have long propagated the idea that GMOs are a Western invention designed to threaten Chinese food supplies.
As a measure of just how strong opposition to GMOs is in China, citizens have taken the unprecedented step of starting a petition against the ChemChina Syngenta deal. A bigger concern for the Chinese government will be how to pay the purchase of Syngenta should it finally be approved. The lion’s share, some $28 billion, of the $43 billion looks likely to come from China’s big banks which can turn to the bond markets and wealthy individuals to raise funds. Syngenta itself will be able to chip in: with expected earnings before interest, taxes, depreciation and amortization for 2016 estimated to be $2.8 by selling bonds of up to 6.5 times those earnings they could raise nearly $16 billion. Further initial acquisition financing from HSBC and Citibank should allow them to scrape the $43 billion together.
Its an unwieldy way to go about it to be sure, but given all the other hoops Syngenta and ChemChina will have to jump through to get this deal off the ground, funding it may just be the easy part.
* Matthew Summers, is an independent financial consultant. Though currently based in London, he previously worked in Dubai and advised international investors interested in Gulf markets.