In Syngenta Bid, ChemChina Follows Buyout Formula
Editor's note: We have taken this story off our home page because it has caused confusion among some readers. Originally published on Oct.13, 2016, this story was republished today as part of a Top 10 List of stories for the past year. But the events it records occurred last year. We apologize for any confusion this may have caused.
(Beijing) — A bold leveraging strategy and complex financing have driven a successful global acquisitions campaign at state-owned China National Chemical Corp. (ChemChina) that's now targeting Swiss agribusiness giant Syngenta AG.
The $43 billion bid for Basel-based Syngenta, the world's third-largest seed supplier and top pesticides maker, is the latest thrust for a decadelong campaign that's increased ChemChina's assets by monetary value more than sixfold to 370 billion yuan ($55 billion) as of 2015 from 60 billion yuan in 2004.
The Beijing-based company's buyout trophies include a French livestock feed concern, an Israeli agrochemicals manufacturer, an Italian tire maker and other companies around the world.
The proposed Syngenta deal, which was unveiled in February and is now undergoing regulatory reviews in China and Europe, would dwarf all of ChemChina's previous takeovers. ChemChina's post-merger assets would nearly double to more than 700 billion yuan.
As with previous takeovers, ChemChina's Syngenta strategy hinges on a high degree of leverage and the use of special financing vehicles (SPVs). But questions have been raised about whether leveraging the mega-acquisition makes sense. And Beijing authorities have lately turned ambivalent.
Borrowing is key because ChemChina, which according to a company document had a debt-to-assets ratio exceeding 80 percent at the end of March, might get away with providing none of its own money toward the buyout, according to documents filed with the U.S. Securities and Exchange Commission and agreements signed between the company and its lenders.
ChemChina reported only $1.65 billion in registered capital and more than $45 billion in liabilities at the end of March, according to the company's first-quarter financial report. Among the banks that have made loans to the company, China Development Bank and China Construction Bank hold the most debt that has not been paid back yet.
According to the unlisted company's annual financial reports, ChemChina lost money every year between 2012 and last year, despite government subsidies totaling 5.8 billion yuan for the four years combined. The bloodletting continued in the first quarter, with ChemChina reporting a net loss of about 11.6 billion yuan.
But the losses have not dampened ChemChina's enthusiasm for a Syngenta buyout, which would be the largest-ever foreign acquisition by a Chinese firm. The current record-holder is meat processor WH Group, which in 2013 acquired U.S. pork producer Smithfield for $7.1 billion.
Underscoring the Chinese government's lack of enthusiasm is the fact that none of the four largest state-owned banks has joined a group of domestic and foreign lenders offering to finance the Syngenta takeover. Leading these lenders are Chinese commercial Citic Bank and the London-based HSBC.
Several sources close to the deal told Caixin that at least three other state institutions — Citic Group, agribusiness giant COFCO Group, and the sovereign wealth fund China Investment Corp. — approached Syngenta about a possible acquisition before ChemChina's bid emerged, but they later bowed out.
According to internal ChemChina documents obtained by Caixin, the company plans to use a three-layer financing structure with six SPVs to raise the $50.4 billion needed for the Syngenta buyout and post-takeover integration. Each SPV would be indirectly controlled by ChemChina.
ChemChina registered four of these SPVs in February in Hong Kong through its wholly owned subsidiary China National Agrochemical Corp. Another two SPVs were created in Luxembourg and another in the Netherlands.
Based on ChemChina documents that outline the financing package, four SPVs would be used to borrow money or raise funds by issuing stock. Most of the funds would come from the two bank consortiums in the form of syndicated loans.
Loans from the HSBC consortium would be guaranteed by Syngenta equity, and ChemChina would use its own assets to guarantee loans from the Citic consortium, according to the documents.
About $43 billion of the $50.4 billion raised would go toward buying all of the Swiss company's equity. The rest of the money would cover assets-reorganization activity and associated expenses.
The plan calls for raising funds in stages, apparently in order to meet debt-ratio conditions set by creditors and regulators, said Ye Xiang, chief economist at Hong Kong-based brokerage firm Guoyuan Securities.
This complex financing arrangement has raised questions about ChemChina's real ability to acquire and absorb Syngenta.
"Under normal commercial conditions," said a financial analyst who has following the proposed tie-up, "it's impossible for a company with such a high leverage ratio to raise funds at such a large scale."
ChemChina is under pressure to make the deal work. Its agreement with Syngenta says that if the proposal were to fall through, the Chinese company would have to pay the Swiss target at least $3 billion
But the complex financing strategy has yet to be finalized because ChemChina is, ultimately, a major state asset subject to central government decisions.
Strength in Weakness
ChemChina Chairman Ren Jianxin is heading the company's overseas expansion campaign because he sees acquisitions as an easy way to boost the volume and quality of the money-losing company's assets, according to ChemChina staffers who asked not to be named.
Ren, 58, has directed ChemChina with a strong hand. ChemChina was created in 2004 based mainly on the assets of a chemical company he created, later known as China National BlueStar (Group) Co., which had acquired and consolidated more than 100 state-owned petrochemical enterprises. BlueStar is now a wholly owned subsidiary of ChemChina and a major platform for overseas investing.
"ChemChina started from a very weak position, carrying the debt burdens" of smaller state companies that it absorbed over the years, said a person familiar with the company.
Although ChemChina officials turned down Caixin's repeated requests to interview Ren or any other executive about the buyout campaign, company staff members who spoke with Caixin privately said the chairman has acknowledged the financial weakness. At the same time, though, Ren has pursued cleverly financed acquisitions as a way out.
Ren once described ChemChina as a "sick sheep," company staffers told Caixin. Only by taking over "healthy sheep" could the company dilute the company's poor assets-to-liability ratio, they quoted Ren as saying.
Through BlueStar, ChemChina made its first overseas acquisition in 2005 by buying the French animal nutrition company Adisseo for 400 million euros ($440 million).
Adisseo is one of the world's biggest livestock feed additives suppliers but got into trouble with the rest of the industry during a tumultuous period following an H1N1 bird flu outbreak in 2004.
The successful takeover of Adisseo spurred ChemChina to launch more overseas purchases in France, Italy, Germany, Israel and Britain.
In 2006, ChemChina became the world's third-largest organic silicon producer by taking over a unit of the French company Rhodia. It also bought an Australian company that made polyethylene.
Other high-profile acquisitions included the 2015 purchase of Italian tire maker Pirelli for about $7.7 billion, and the takeover of Israel's Makhteshim Agan Group, the world's largest maker of generic pesticides, for about $2.4 billion in 2011.
Most of these deals were heavily leveraged.
Several investment analysts familiar with ChemChina's business strategy said the company "rarely" uses its own capital for acquisitions. Instead, they pointed out, acquisitions are often financed by leveraging bank or other financial institution funds with shares of the purchased companies. Equity thus becomes collateral for the loans.
This financing strategy is at the heart of Ren's business acumen, said one analyst. It's also Ren's style to let acquired companies continue to operate independently, analysts said.
In some cases though, the acquired company's assets have been transferred to ChemChina subsidiaries, according to a Caixin analysis of stock exchange data.
In 2015, for example, ChemChina injected 85 percent of Adisseo's equity into a subsidiary called Shanghai-listed Bluestar New Chemical Material Co., swapping out the latter's debt. The firm was renamed Bluestar Adisseo Co. and reported a 1.5 billion yuan net profit. Bluestar New Chemical had reported a net loss of more than 1 billion yuan the previous year.
Despite this fancy financing, however, ChemChina's financial position did not significantly benefit from these asset swaps. In fact, the parent company continued losing money.
Betting on Syngenta
ChemChina first proposed buying Syngenta in May 2015, shortly after the Swiss company rejected a takeover offer from its larger U.S.-based rival, Monsanto.
The Chinese proposal won support from Syngenta's board of directors and management based on ChemChina's promise of an all-cash purchase. The suitor also pledged to retain current management. And the Chinese company said it was interested in the deal purely as a financial investment.
Nevertheless, industry analysts saw the deal as a chance for ChemChina to secure a foothold in the U.S. market for farm inputs. And other analysts noted that Chinese government authorities would give weight to the deal's ability to complement a national effort to beef up the domestic agriculture industry and improve food supply security.
"The Chinese government will want to see the deal completed one way or another," said a person close to Syngenta.
The government's policy agenda for this year highlighted an interest in strengthening the nation's agriculture industry through overseas acquisitions.
And government agriculture officials in recent years have emphasized a desire to boost the nation's seed industry and agrochemical sector through better research. Yu Xinrong, the vice minister of agriculture, said in 2014 that China's 10 largest seed companies were annually investing less than 600 million yuan combined in research — less than 10% of the amount Monsanto spends annually on research.
Industry analysts who support ChemChina's offer said Syngenta's research capacity combined with its rich storehouse of seed and agrochemical patents would supercharge China's agriculture industry.
Zhang Xiaoping, chief China representative of the U.S. Soybean Export Council, said the deal would give ChemChina access to Syngenta's intellectual property rights, risk control techniques and environmental strategies that are currently lacking in China.
At the same time, if the deal goes through, Syngenta's global network could be used to disseminate the market-relevant results of research conducted by Chinese scientists.
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