ChemChina SOE status sees lenders keen to back Syngenta buy despite balance sheet stretch
Lending banks will be keen to back China National Chemical Corporation (ChemChina)'s estimated USD 43bn bid for Syngenta [VTX:SYNN] despite the debt burden the deal will place on the acquisitive state-owned group’s stretched balance sheet, according to bankers and a source familiar with the SOE.
On announcement of the deal, Wednesday, the parties said there was committed financing for the deal but did not detail the facilities. One newswire report said ChemChina has lined up USD 25bn in bridge financing for the deal. It is not clear how the remainder of the all cash deal will be financed.
The deal is being financed with a combination of debt and equity, and will be refinanced over time, one person close to the situation said. According to the person, ChemChina’s CEO said there was strong interest in the investment from both Chinese and International banks, and more information on the financing structure will be disclosed in due course.
One Hong Kong-based lender expected a deal to be largely debt funded providing the combined ChemChina/Syngenta net debt/EBITDA above 10x.But, banks will take comfort in the fact ChemChina is a state-owned enterprise backed by the Chinese government and will likely be keen to participate in the financing, he said. He estimated at least 20 banks will be needed to finance the deal .
As of 31 December 2014, ChemChina had a Net Debt/ EBITDA of 6.72x based on a reported net debt of CNY 116.72bn (USD 17.73bn) and EBITDA of CNY 17.38bn (USD 2.64bn), according to the prospectus for the CNY 2.5bn medium term notes released in Nov 2015.
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Since then the Chinese SOE has taken on a reported USD 7.3bn in bridge financing from JPMorgan for the (USD 7.9bn) acquisition of Italy’s Pirelli. ChemChina also took part in an agreed consortium bid to buy German machinery company, Krauss Maffee, for USD 1bn and bought a 12% stake in Swiss energy trader, Mercuria, for an undisclosed sum.
As of 31 Dec 2014, Pirelli had net debt of EUR 980m (USD 1.07bn) and a group EBITDA (before restructuring costs) of EUR 1.17bn (USD 1.27bn).
As of 31 Dec 2015, Syngenta reported net debt of USD 2.586bn and EBITDA of USD 2.777bn.
Assuming an offer price of CHF 475 per share (CHF 480 less the CHF 5 special dividend), based on the above latest available figures and the estimated CHF 44.15bn (USD 43.4bn) equity cost of acquiring 100% of Syngenta at CHF 475 per share, the combined group would have a net debt/ebitda ratio of around 10.86x, according to Dealreporter analytics.
ChemChina has been trying to build a financing consortium for a while, according to a Europe-based banker.
The offer price implies an equity value of CHF 44.15bn (USD 43.4bn) and values Syngenta at 16.51x EV/EBITDA. At that price, ChemChina is paying away most of the synergies, the Europe-based banker argued.
But cost synergies are not really what Chinese companies are after, the first lender said. The attraction to the Chinese is market share, new markets, products and technology, he said. Reports have highlighted how the potential deal is in line with the Chinese President Xi Jinping’s attempts to maintain self-sufficiency by ramping agricultural output.
The first lender believed the SOE would likely debt finance most of the deal. ChemChina’s internal cash won’t make a dent on the deal value and is needed for subsidiary operations, he said. Chemchina had cash of USD 3.1bn as of 31 December, according to the bond prospectus. The European banker was also skeptical over the ability to partially equity finance the deal.
This deal will involve Chinese state-backed money as it is doubtful ChemChina can support this deal on its own balance sheet, a third source familiar with ChemChina said.
ChemChina declined to comment on details beyond today's official announcement of the deal. Syngenta also declined to comment.