A worker holds a handful of onions while harvesting the crop on a farm near Chandwad, Maharashtra, India. (Photographer: Kuni Takahashi/Bloomberg)  

UPL Jumps The Most In Four Years After $4.2 Billion Deal To Acquire Arysta Lifescience

Shares of UPL Ltd. jumped the most in over four years after most brokerages deemed its deal to buy agri-pesticides maker Arysta LifeScience Inc. as value accretive.

The Indian chemicals maker on Friday agreed to take over the unit of Bill Ackman-backed Platform Specialty Products Corp. for $4.2 billion in cash. The deal, subject to regulatory approvals, is expected to be completed by early next year.

The deal will make UPL the world’s fifth-largest crop protection company, according to international research firm CLSA. The stock rose nearly 15 percent to Rs 631.35 apiece in early trade.

The buyout will be funded by a combination of newly issued equity and debt.

UPL Jumps The Most In Four Years After $4.2 Billion Deal To Acquire Arysta Lifescience

The company will receive $1.2 billion as equity investments in UPL Corp, the company’s international arm, by Abu Dhabi Investment Authority and TPG. They will invest $600 million each for a combined 22 percent stake.

The balance will be funded through $3 billion in debt financing from MUFG Bank Ltd. and Rabo Bank with a bullet maturity of five years. UPL will bear $120-125 million in interest cost annually, indicating a 4-4.5 percent rate of interest.

Shares of the chemicals maker have fallen more than 14 percent in the last one month amid worries that the deal will increase UPL’s leverage. UBS, in a prior note, estimated that the acquisition could increase UPL’s leverage fourfold. Net-debt-to Ebitda may rise from 1 to 4.2 times if the deal goes through, it said.

Geographical Presence

Through the acquisition, UPL will get access to new markets like Africa, Russia and Eastern Europe. The deal will further strengthen its footprint in Europe and Latin America and will offer a significant advantage in negotiations with suppliers and distributors, said Investec in its report.

Positives for UPL

  • Following the buyout, the combined entity will have annual sales of about $5 billion and an Ebitda of nearly $1 billion, with margins of around 20 percent (pre-synergies).
  • The combined entity, the management said, will realise revenue synergies in the range of $400-500 million from the next financial year onwards and annual cost synergies of about $200 million.
  • UPL expects the acquisition to be EPS (earnings per share) accretive by an estimated Rs 10-12 a share in the next financial year (excluding the impact of any non-cash amortisation of goodwill).
  • The acquisition will not bring any additional debt from Arysta’s books.
  • Arysta has much richer product offerings and a wider reach compared to UPL as it is present in over 100 countries.
  • Arysta has a presence in Eastern Europe, Russia, Middle East and Africa, with crops specialisation in wheat and certain other specialty crops like fruits and vegetables.
  • UPL will benefit from forward integration with an asset light model as Arysta’s is predominantly focused on formulations, while UPL manufactures chemicals.

Key Concerns

  • May take longer-than-anticipated to realise revenue synergies of $400-500 million, according to Emkay.
  • Management expects net debt-to-earnings before interest, tax, depreciation and amortisation to rise to 3.2-3.5 times initially. But, it aims to reduce it to 2.5-2.7 times by the financial year through March 2020 post synergies.
  • The $3-billion debt will reduce the return on common equity from 22 percent to 18.3 percent, broking firm Emkay said. (ROCE measures the ability of a firm to generate profits from its shareholders investments).
  • Slowdown in agrochemicals consumption.
  • New products won’t take off as expected.

Brokerages’ Take

CLSA

  • The acquisition offers scale benefits and discovery capabilities.
  • The $3-billion debt by UPL to take net leverage to 3-3.5 times.
  • Expects deal to be EPS-accretive for UPL.
  • The stock trades at a discount to peers and its own historical average.
  • Maintains a ‘Buy’ rating on the stock.

Emkay

  • The management expects savings of $200 million through cost synergies.
  • Expects deal to be EPS-accretive but high leverage is a concern.
  • Maintains a ‘Buy’ on the stock but lowered target price to Rs 773 apiece from Rs 923 earlier.

Investec

  • The company has taken a measured leap.
  • The synergy realisation can result in significant upsides.
  • UPL Corp’s valuation implies negative value for profitable India business.
  • The deal is likely to be value accretive.
  • Maintains a ‘Buy’ on the stock with a target price of Rs 785.