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 Valentine's Day, so it's no surprise that even the ugliest ducklings in the corporate world are hoping to find love. 

Noble Group Ltd., whose shares were down 93 percent from their 2011 peak as of Monday, is in talks over a strategic investment, the Hong Kong-based commodity trader said Tuesday. The potential suitor is Chinese chemicals giant Sinochem Group, people familiar with the talks earlier told Javier Blas of Bloomberg News.

It's no compliment to say that the two businesses appear to be made for each other. Noble and state-owned Sinochem, along with its listed subsidiary Sinochem International Corp., operate on gossamer-thin margins on a good day -- and lately, there haven't been many good days.

This Is Fine
Net income margins at Noble and Sinochem rarely break above 1%
Source: Bloomberg
Note: Sinochem Group is the state-owned parent; Sinochem International is the listed, state-controlled subsidiary.

Debt is also a major burden. In a world where the median S&P 500 energy company has net debt of 2.9 times Ebitda, analysts expect Noble to post a ratio of 7.3 for the 2016 fiscal year and Sinochem International to come out at 5. (Sinochem Group was on a 9.5 times multiple -- but whereas Noble's debt problems have caused its managers and shareholders years of heartache, such ratios appear to be meaningless for China's state-owned enterprises.)

Borrow Pit
Net debt to Ebitda at Sinochem's state-owned parent makes Noble look unleveraged
Source: Bloomberg
Note: Based on 2015 fiscal year figures (Sinochem Corp.); analyst estimates for 2016 fiscal year figures (Noble, Sinochem International); median of latest reported figures (S&P 500 materials).

Sinochem Chairman Frank Ning is a born dealmaker who's been picking off Noble assets for years. As chairman of state-owned food giant Cofco Corp. until last January, he led the two-stage purchase of Noble's agricultural-trading business for about $2.25 billion in 2014 and 2016. Since being shifted across to Sinochem, he's been the driving force behind a push for the company to merge with China National Chemical Corp, or ChemChina, the Financial Times reported in October without saying where it got the information.

What exactly would these two misfits see in each other?

Sinochem Group has been diversifying for decades and in many ways resembles an oil company more than a chemicals group these days: The 254 billion yuan ($37 billion) in sales from its integrated oil business in 2015 was equivalent to two-thirds of its 381 billion yuan total revenue.

That's a neat fit with Noble, whose trading activities make it a major player in the energy business. Revenue from its oil, coal, gas and power units came to about $42 billion over the 12 months through September.

Wounded Giant
Noble has had its problems, but its $42 billion of energy revenues still make it a major player
Source: Bloomberg, company reports and websites.
Note: Revenue figures for oil and gas producers are for latest full-year results. Energy trader figures are based on website data, except for Glencore, which is for 2015, and Noble, which is for the 12 months through September 2016.

Noble also looks relatively cheap. Even after a $2 billion-odd capital reduction last year from selling new shares and divesting its North American power-trading business, the stock is still at a 40 percent discount to its book value.

Pumping in cash from China Inc.'s magic money box in exchange for shares might help put Noble's leverage on a more sensible footing, assuming existing shareholders such as outgoing Chairman Richard Elman are prepared to put up with the dilution. Investors certainly welcomed the prospect, driving Noble shares up as much as 17 percent on Tuesday.

Assume, for the sake of argument, that Sinochem bought a 49 percent stake in the company at a 30 percent premium to the current share price. Such a deal would provide about $1.3 billion of cash, sufficient to bring net debt to about 3.8 times the $367 million of Ebitda that analysts forecast for the 2016 fiscal year.

It's Alright Ma, I'm Only Bleeding
Noble's trailing 12-month free cash flow hasn't been in the black since 2013
Source: Bloomberg, Gadfly calculations

Whether it would stay that way is another matter. You have to go back all the way to 2013 to find a point when Noble's trailing 12-month free cash flow was in positive territory, suggesting that cash alone won't be enough to solve all the issues with the business.

Still, having a couple of generous sugar-daddies has worked well for Olam International Ltd., its fellow Singapore-listed commodities trader, and Noble has been actively primping itself for strategic suitors in recent months. If a down-on-her-luck commodities trading giant can't find love with a Chinese SOE in these times, what hope is there for the rest of us?

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

  1. Reuters had earlier reported the deal interest.

  2. Equity value.

  3. About 20 percent of operating income from those businesses was generated by its North American Energy Solutions business, according to a June presentation. That unit was sold in December.

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