Current Price –$79.34
Offer Price – $93
Upside – 17.5%
Expiration Date – TBD (likely in H1 2017)
Let me start by saying that this is a large cap transaction and the deal is widely followed and analysed – I do not have any superior insights with regards to the likelihood of the transaction going through so my opinion is as good as anybody’s else. However, I believe this opportunity is quite interesting, spread is large (17%) and therefore worth flagging.
In Feb 2016 ChemChina agreed to acquire Syngenta at $93 per Syngenta ADS. Syngenta operates in crop protection and seed businesses – industries which are lately subject to other mega M&A deals including Dow Chemical and DuPont merger as well as Bayer’s acquisition of Monsanto.
ChemChina is Chinese state owned company so this transaction has national strategic interest written all over it. This would also be the biggest ever overseas acquisition by Chinese firm. So besides any financial pay-off/valuation considerations, ChemChina obviously has other motives to get this transaction closed.
The deal has already been approved by a number of national regulators including those of United States, China, Japan, Switzerland, Australia, South Africa and Israel. After US approval (August 2016) the spread has narrowed to single digits, but has widened again since. Also the financing for the transaction has been arranged and is irrevocable.
Reasons for 17% spread
There are three main factors behind the 17% spread and market’s skepticism with regards to the likelihood of transaction going through.
1) The main reason is the pending anti-trust approval by European Commission. The commission has launched in-depth review that has been extended to March 29th, 2017 (more on that here). I think approvals by other regulators globally provide at least some comfort with regards to expected EU decision. European Commission is also unlikely to deny the transaction outright, but probably will ask to divest certain businesses to maintain competitive markets for Syngenta products. At the same time ChemChina has repeatedly expressed willingness to work with EU regulator to find acceptable form of transaction.
2) In the beginning of December China’s government has announced that it will start rigorously regulating outward fund flows including those for M&A deals. This article provides a good overview of the situation. Market is clearly concerned that the merger might simply be banned by Chinese due to these new restrictions on outbound direct investment. My think is that merger of such scale (record outward investment for China so far) already has full support from the authorities and new regulation will be an issue.
3) Syngenta operating performance over the last couple of quarters has been below expectations. I do not believe that this anyhow affects ChemChina’s willingness to acquire Syngenta – ChemChina would be strategic long term investor and short term performance is clearly of no concern. However, if the deal breaks, Syngenta would likely trade lower as a standalone company.
Right before the acquisition announcement Syngenta traded around $70/share, but rumors about potential merger started spreading earlier in Autumn 2015 – pre-rummor Syngenta share price was c. $65. If the deal breaks, Syngenta will probably trade down to these levels, or potentially lower due recent operating performance. On a positive note, the whole sector is consolidating and Syngenta will probably remain an acquisition target – Monsanto wanted to buy it in 2015 and BASF was rumored to be a potential suitor as well. All in all, I expect Syngenta to trade somewhere around $65-$70/share if the deal breaks, representing 11%-17% downside.
Thus downside and upside are quite similar for this transaction, suggesting market is seeing the probability of deal closing at c. 50%.
Due to reasons outline above (large cap deal where I have no specific insight) I have only a tiny long SYT position.