China National Chemical Corp's $46 billion takeover of Syngenta faces two key risks, political and financial. Syngenta shareholders need to be alert to both.
First, there's the not insignificant matter of currency. ChemChina plans to pay for Syngenta in US dollars, not Swiss francs. A bit more than 60 percent of the target's shareholder base is registered in the U.S., according to Bloomberg data, but the primary listing is in Switzerland.
Just a week before the deal's announcement, ChemChina told Syngenta that it wished to make its offer in dollars, not Swiss francs, "due to the currency and terms of its financing and the potential lack of liquidity in the foreign exchange markets for such amounts," according to a Syngenta filing with the SEC.
Of course when you need to borrow $50 billion for a deal, as Bloomberg News reported, liquidity matters.
Syngenta told ChemChina it would prefer a Swiss franc offer, with one eye on its Swiss retail investors. But ChemChina won out. When the two proudly unveiled the deal in February, they said it was worth 480 Swiss francs per share, comprised of $465 plus a 5 Swiss franc special dividend, and based on exchange rates at the start of that month.
But currencies, not least Switzerland's, have a habit of shifting. The franc has since gained more than 6 percent against the greenback. That means the offer is now worth about 452 Swiss francs a share.
When Gadfly queried this, Syngenta said the price is being paid in dollars because it has a "large international shareholder base" and its reporting currency is US dollars. It said the offer continues to recognize "the value of Syngenta's leading portfolio, market positions and people."
That's as may be. But Syngenta's also pretty clear about who bears the exchange rate risk (hint: it's not ChemChina). Swiss franc proceeds "may be materially adversely reduced through changes of the exchange rate," ChemChina's public tender offer notes.
Just as Syngenta shareholders can't control currency markets, nor can they dictate political winds. The U.S. Committee on Foreign Investment in the United States could yet decide to throttle the deal, with UBS analyst Patrick Rafaisz describing its thinking as "somewhat of a black box."
CFIUS doesn't have to explain its decisions so trying to anticipate them involves conjecture: hardly a sound foundation for a $46 billion takeover.
With all this in mind, Syngenta's shares have stuck around 400 Swiss francs since the deal was announced, 10 percent below its current value. That's appropriate. Bloomberg data models the chances of the deal's completion at little more than half, similar to UBS.
As recently as October, Syngenta shares traded at 300 Swiss francs, so shareholders have much to lose. And if CFIUS says no, there's a risk Syngenta won't get its $3 billion break fee from ChemChina.
CFIUS hasn't blocked an agriculture deal before but this is election year. It's easy to imagine a state-owned Chinese company's acquisition of genetically modified seed technology becoming a political football. A group of farm-state senators, including Chuck Grassley, chair of the Senate Judiciary Committee, has spoken out over food-security risks while agriculture secretary Tom Vilsack has raised market access concerns.
It also seems unlikely Donald Trump, Republican party contender, will be keen. After China's finance minister Lou Jiwei criticized his trade policies last week and branded him "irrational", Trump criticized China's "economic war" on the U.S.
In the event a deal was blocked, ChemChina could always offer to sell some U.S. assets. But with this kind of rhetoric, Syngenta shareholders are right to be skeptical.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
Syngenta shareholders are also getting 11 Swiss francs a share in regular dividends for the 2015 financial year.
Private shareholders using a Swiss custodian bank who hold up to 500 shares are eligible to use a US dollar conversion facility.
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