Sinochem overplayed its hand and lost

30 Dec, 2009 09:59 AM
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Nufarm chairman Kerry Hoggard.
Nufarm chairman Kerry Hoggard.

AS A ''get out of jail'' card, the Nufarm board could hardly have done better than the deal struck with the Japanese chemicals group Sumitomo, after being left in the financial equivalent of no man's land by its one-time Chinese partner, Sinochem.

Not only does Sumitomo's proposal to subscribe for 20 per cent of Nufarm at $14 a share provide support and justification for the board's decision to reject Sinochem's lower offer of $12 a share for the whole company, but it also prevents its stock price crashing through the floor.

That would have been the immediate consequence of a wholesale rejection of Sinochem's long-standing courtship of the Australian pesticide producer - a factor no doubt that the Chinese company and its advisers knew would be at the forefront of the board's discussions since their revised deal was lodged with Nufarm four days before Christmas.

Certainly, the market agreed with that thinking (and the likely outcome) by marking Nufarm's shares up 30 cents yesterday to $10.86 after its directors played the penultimate hand in what has become a tortuous game of bluff and double bluff since September.

Given the lack of information from Sinochem about its reasons for trimming a dollar a share off of its previously agreed offer, it's perhaps fair to assume it wasn't aware that Sumitomo was waiting in the wings.

That was the result of a 10-week exclusive deal-sealing period that Nufarm and Sinochem entered into from September 27 which, as every day went on, saw no other competitor emerge as a rival to the $2.83 billion Chinese proposal.

By the time that agreement ran out on December 3 and when Nufarm told the market two days before that it was still prepared to negotiate on a non-exclusive basis with Sinochem to get its offer over the line, the Chinese suitor had grown increasingly confident that it was the only player at the table.

That allowed Sinochem to string out the game for another three weeks, tightening the screws on the Nufarm board, which was still keen to do a deal - albeit that the chairman, Kerry Hoggard, and the managing director (and major shareholder), Doug Rathbone, had told the company's annual meeting on December 3 that nothing less than $13 a share would do.

Sinochem was not persuaded by that and called Nufarm's bluff on December 21 with its lower offer, presumably basing its decision on the difficult position in which Nufarm's directors found themselves and that a price of $12 was still tempting enough in light of the Australian company's three profit downgrades this year.

The offer could also still be considered reasonable from an investor's perspective, given that Nufarm's share price last traded above Sinochem's original $13 proposal in May and only breached the $12 level briefly in August.

In fact, as a tactical battle, Sinochem could well argue that the market has been supportive of its position since mid-November when Nufarm's share price slipped from just below $12 to $10.50.

Since then it has traded in a 60c range, implying a premium of 15 per cent on Sinochem's original offer and a 9 per cent premium on the revised, lower deal announced by the board nine days ago.

But from what Sinochem thought was a position of strength, the Nufarm board has been able to regain the upper hand because of the late intervention of Sumitomo, which with annual revenues of $US19 billion is almost eight times bigger than its new Australian partner.

There's no doubt Sumitomo has been closely watching the Sinochem-Nufarm dalliance, not least for the fact that it was providing yet another example of the way that China is quickly eclipsing Japan as a global economic powerhouse.

A Sinochem takeover of Nufarm would have threatened any ambitions that Sumitomo may have had for establishing itself in Australia, while also presenting the Japanese company with a more formidable competitor in its key overseas markets, most notably the US.

By making its move now, Sumitomo acquires what amounts to a decisive blocking stake if anyone else chooses to target Nufarm, which in the long term is likely to fall fully within Sumitomo's orbit as a wholly owned subsidiary.

The Japanese are spending a total of $660 million - $610 million at $14 a share in buying 20 per cent of Nufarm through a tender offer, and a further $50 million to maintain its new stake through a $250 million entitlement offer.

As for Nufarm, investors can take confidence in the fact that a company currently valued by the market at $2.36 billion is now worth $3 billion thanks to its new strategic shareholder. And that's after a price tag of $2.83 billion in September was cut to $2.61 billion less than four weeks ago.

At the same time, the directors can count themselves fortunate that, for the time being at least, Nufarm will remain an independent and largely owned Australian company run by them - although the board was prepared to give all that up at $13 a share.

Where does that leave Sinochem? In a hole of its own making. It played hard ball and lost. The difference between winning and losing out has proven to be $220 million.

Given the three months it will now take for Nufarm and Sumitomo to secure their partnership, the door is still open for the Chinese to come back with a better offer.

But Sinochem would have to at least match the price proffered by the Japanese. If the Chinese bid again for the whole of Nufarm, it would cost them about $400 million more than they were prepared to pay second time around.

That would also mean taking a longer term and more patient view of Nufarm's prospects.

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