Liberum
SWITZERLAND | AGRICULTURE | SYNN VX | MARKET CAP $35.8bn | 3 February 2016
Syngenta
Recommended US$465/share ChemChina offer + dividends
Buy
Target price CHF400 | Published price CHF393
A US$465/share cash offer from ChemChina is being recommended by Syngenta's Board. The offer includes a CHF5/share special dividend to be paid on closing. Shareholders will also receive a CHF11/share ordinary dividend. The deal values Syngenta at $43bn or 26x 2015 PER. A Swiss and US tender offer will start in the coming weeks with the transaction expected to close by the end of the year, subject to regulatory approval. Syngenta's existing management will continue to run the company which will remain headquartered in Switzerland enabling minimal disruption. The company will remain focused on growth, especially in China, and the expectation is for a future IPO of the business. Syngenta has also released FY15 results, slightly ahead of expectations. We expect these announcements to be welcomed by shareholders.
Details of ChemChina offer for Syngenta
Recommended cash offer for US$465/share (equates to CHF473/share at today's exchange rate) + CHF5/share special dividend to be paid conditional upon and prior to closing.
In addition shareholders will receive the proposed ordinary CHF11/share dividend (flat yoy).
A Swiss & US tender offer will commence in the coming weeks with the transaction expected to close by the end of the year, subject to regulatory approval. The deal is contingent on acceptance by shareholders representin 67% of the share capital.
ChemChina has committed financing in place. There appears to be no break fee included. We look forward to hearing more detail on the regulatory process during the conference call.
Rationale for the acquisition
ChemChina's acquisition should entail minimal disruption for Syngenta. The existing Syngenta management will continue to run the business and the company will continue to be headquartered in Switzerland.
After closing a ten member Board will be chaired by Ren Jianxin, Chairman of ChemChina with Syngenta's Chairman, Michael Demare, as Vice Chairman. Three other of the ten Board members will be existing Syngenta Board Members.
The company will remain focused on growth with a particular focus on China and other emerging markets (where Syngenta already has a strong presence). The expansion into China will expand Syngenta's global #1 position in crop chemicals and give significant scope for growth in seeds.
The future intention is for an IPO of the business
Key data from FY15 results
FY15 EPS -9% to $17.8: vs. our estimate of $17.2 and consensus of $17.6
FY15 EBITDA -5% to $2777m (+16% in l.c.): vs our estimate of $2744m and consensus of $2753m
FY15 Sales -11% to $13.4bn (+1% in l.c.): vs. our estimate of $13.2bn and consensus of $13.6bn
FY15 FCF -31% to $806m: vs. our estimate of $744m as a result of a build up of receivables in Latin America. Net debt ended the year at $2586m (gearing of 31%).
FY15 dividend flat at CHF11 vs our estimate of CHF11.5 and consensus of CHF11.8.
No sale of Vegetable seeds: Syngenta has decided not to pursue the divestment of Vegetable Seeds and the associated share buy back. In the future, Vegetable Seeds will be run as a separate business within the company reflecting its distinct customer and distribution base.
Divisional detail in 4Q15
Crop Protection 4Q15 sales -16% in l.c. to $2154m vs. -9% growth in the 9M period. Drivers of the reduced sales include lower volumes and prices for glyphosate and reduced insecticide sales in Latin America due to dry weather and high industry inventories. New products Elatus and Acuron continued to grow strongly.
Seeds 4Q15 sales +32% in l.c. to $856m vs. -2% growth at the 9M period. The growth was driven by the new licensing agreement with KWS and Limagrain in corn.
Outlook statement
"In 2016 our focus will be on further improving profitability in challenging market conditions. Progress will be underpinned by additional cost savings and by a reduction in raw material costs." "A release in working capital will contribute to an increase in FCF for the year to over $1bn".
Conference call details
Syngenta will host a conference call at 7.30am UK time (8.30am CET). To register in advance of the call please use the link: http://emea.directeventreg.com/registration/24244035
Valuation summary at the ChemChina offer price
Figure 1: Syngenta valuation Summary at ChemChina's offer price of US$465/share + CHF5/share special dividend
Valuation Summary
2013
2014
2015E
2016E
2017E
PER
20.9
18.2
26.4
24.8
23.2
PER post exceptionals
22.7
20.1
32.2
27.4
24.9
EV/EBITDA
13.4
11.7
16.1
14.4
13.4
EV/EBIT
16.8
14.8
20.4
18.0
16.8
EV/Sales
2.6
2.3
3.3
3.2
3.1
FCF Yield
1.4%
3.9%
1.9%
4.7%
4.5%
Dividend Yield
2.7%
3.4%
2.3%
0.0%
0.0%
EV/CE
4.0
3.7
4.6
4.3
4.2
Total Cash Return Yield
2.7%
3.5%
3.1%
6.2%
1.8%
Profitability
Gross margin
45.6%
46.0%
47.1%
50.3%
51.3%
EBITDA margin
19.7%
19.3%
20.7%
22.4%
23.4%
Operating margin
15.4%
15.3%
16.3%
17.9%
18.7%
ROCE
19.7%
21.4%
18.4%
19.4%
20.1%
ROE
18.8%
20.1%
18.8%
15.9%
16.0%
Financial
Net Gearing
23.9%
27.3%
30.8%
-2.2%
-12.1%
Net Debt/EBITDA
0.8
0.8
0.9
-0.1
-0.5
Capex/Sales
4.3%
4.0%
4.5%
4.0%
4.0%
R&D/Sales
9.4%
9.4%
8.8%
8.9%
8.9%
Capex/Depreciation
1.8
1.6
1.3
1.2
1.2
Dividend Cover
1.9
1.8
1.6
N/A!
N/A
FCF / Net Income
32%
80%
60%
125%
112%
Bernsein
SYNGENTA >> Confirmed offer from ChemChina at 480 share (incl special div CHF5), so slightly higher than the rumoured CHF470. Deal should close by year end and is unanimously supported by the management who will keep their jobs. Looks like a very clean deal with Chemchina trying to appease Swiss establishment by agreeing to RE-IPO over the coming years. Little anti-trust issues but may be looked into by the CFIUS (although little precedent), Can’t see any chance of counter offer from Monsanto given high price and all cash. Would expect shares to trade around 435 level this morning, around 10% discount to the terms: BERN