ChemChina, a leading Chinese chemicals manufacturer plans to buy a controlling stake in Israel’s MA Industries for $1.44bn. The proposed deal to buy 60% stake in MA Industries, a leading manufacturer of crop protectants such as pesticides, would be one of the largest Chinese acquisitions to date in the agrochemicals sector. ChemChina’s move underscores how vital food security is for China nowadays, after the relevant regulations and market changes. Few months ago, Sinochem considered a bid for Canana, showing the importance of the sector to China. Sinochem was offering 12 times Canana’s Net Income. The proposed deal values the MA Industries equity at $2.4bn, when its equity market value is $1.8bn. When MA Industries filed its most recent quarterly results, the company’s net 15-year debt stood at $971m (interest expense and rate equal 6% and 5% respectively). ChemChina plans to acquire the 53% of MA Industries currently held by public shareholders and an additional 7% owned by Koor. The deal is to be signed in the next two weeks. The price of MA Industries’ jumped by 20% following the announcement. ChemChina, a state-controlled enterprise, already owns Qenos, an Australian plastics maker, and Adisseo, a French animal nutrition company. The group spans 140 countries with 160,000 employees. ChemChina is perhaps best known as the partner or Blackstone’s first investment in China. In 2007, the US private equity group paid $600m for a 20% stake in China National Bluestar, a subsidiary of ChemChina. MA Industries is the world’s 7th largest agrochemicals company. It specialises in manufacturing products invented by other companies, which are no longer protected by patents. Its main production facilities are in Israel and Brazil, with smaller plants in Spain, Colombia and Greece. It has more than 3,000 employees worldwide. ChemChina’s talks with MA Industries follow a failed deal effort in Australia six months ago, where ChemChina tried to acquire Nufarm but ultimately walked away. ChemChina has mandate to go global.
(a) What are ChemChina’s motivations for the acquisition of MA Industries? Explain and discuss each.
(b) MA Industries specialises in manufacturing products invented by other companies, which are no longer protected by patents. Some of these patent-related assets are not valuable for ChemChina’s and for this reason ChemChina plans to sell them for $10.5m. What is MA Industries enterprise value? You can use the market value of equity after the announcement as the equity price.
(c) This year, MA Industries’ net income is 250m, change in net working capital is 15m, depreciation & amortization is 60m and capital spending is 150m. MA Industries paid for preference shares dividend of 5m and repaid 100m of debt. Considering that particular assets are not in the interest of ChemChina, only 65% of the free-cash flows bought will help in synergy creation. Cost-of-equity is 9.5% and assume that there is constant growth rate in perpetuity of 4%. Do you think ChemChina overpaid for MA Industries, given that chemical manufacturers tend to provide a control premium of 10%? You can consider the equity price after the announcement as the offer price.
(d) Based on the case study, Sinochem offered 12 times Canana’s Net Income for a controlling stake. Considering this, calculate the MA Industries value. Explain why there is possibility for the price to be different compared to your answer in section (c) above.
(e) MA Industries price increased significantly after the announcement. Explain why this happened. You may provide supportive empirical evidence related to the market reactions after the announcement of a potential acquisition.
(f) Following this market reaction related to MA Industries, the price of MA Industries competitors went up. Explain why.