Deals

David Fickling is a Bloomberg Gadfly columnist covering commodities, as well as industrial and consumer companies. He has been a reporter for Bloomberg News, Dow Jones, the Wall Street Journal, the Financial Times and the Guardian.

It's a classic scene from old Westerns: A group of grizzled townsmen are betting all their money on an interminable round of poker games, when some prospector waltzes in and chucks a bag of gold on the table. Should they keep playing, or bow out?

That's what ChemChina just did to the multi-year round of courtship between the world's biggest agricultural chemicals companies. The state-owned giant, whose operations encompass tires, plastics, fertilizers, animal feed and silicon for use in solar panels, has made an offer for Switzerland's Syngenta for 449 francs a share, people with knowledge of the matter told Bloomberg News. That values the world's biggest pesticide producer at about $42 billion, a 30 percent premium.

It's not great timing for the other players, who've been edging toward their own deals in response to demands from activist investors. Syngenta's Chief Executive Officer Mike Mack quit just over three weeks ago amid a shareholder outcry after the company rejected three separate takeover bids from Monsanto since 2011. Two weeks before that, DuPont CEO Ellen Kullman left after fighting off pressure from Trian Fund Management to dismember the business. Dow Chemical CEO Andrew Liveris is planning to divest his own agriculture unit amid lobbying from Third Point, while the ongoing slump in soft commodities is forcing Monsanto to fire about 12 percent of its workforce and cut earnings forecasts.

ChemChina isn't publicly traded so any offer would probably be all-cash, in contrast to the mix of cash and shares offered by Monsanto. That's about the only positive you'd expect Syngenta's board, which snubbed a final Monsanto proposal that was $4.2 billion higher than this bid, to see in the deal. Chairman Michel Demare cited valuation and execution risks in a YouTube video defending his decision to spurn Monsanto's approach. Those apply just as much, if not more so, to ChemChina. Syngenta is also fighting off lawsuits from Cargill and Archer-Daniels-Midland after Beijing dragged its feet on approving imports of its pest-resistant corn. The experience is unlikely to have left the board favorably disposed to China Inc.

The more interesting question will be how the other players respond. Monsanto is probably too bruised from its three previous bids and focused on internal problems to do anything but fold right now. Dow is looking to reduce its exposure to agriculture, so will probably stand pat. DuPont is the only one of the four whose forward price-earnings ratio is higher than Syngenta's, so could possibly pull off a takeover without destroying shareholder value:

This is DuPont's Moment
Price-earnings ratios of agricultural chemicals businesses, blended forward 12 month
Source: Bloomberg data



Still, that valuation premium has a lot to do with expectations new Chief Executive Officer Ed Breen will break up the business. Shareholders are unlikely to look favorably on a proposal to do just the opposite.

What about Syngenta itself? It's in a prime position to turn from prey to predator and could buy either DuPont or Dow's farm businesses, according to Sanford Bernstein. DuPont, at least, is open to that prospect, the Wall Street Journal reported earlier this month and Dow's already touting such a deal. The Swiss business has a strong portfolio of corn and soy biotech which would fit neatly with DuPont's germplasm, the genetic library of crop variants, according to Bloomberg Intelligence. With year-end net debt forecast at barely more than full-year Ebitda, it has ample capacity to pursue deals: 

Max Headroom
Syngenta's net debt rarely runs ahead of its annual earnings
Source: Bloomberg data

Those plans may accelerate as a result of ChemChina's interest, but they won't be enough to fend it off. Big acquisitions only work as poison pills if your suitor is a public company which can't afford to buy the enlarged business. China's state-owned enterprises don't have credit limits on their checkbooks.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
David Fickling in Sydney at dfickling@bloomberg.net

To contact the editor responsible for this story:
Matthew Brooker at mbrooker1@bloomberg.net