Sinochem offer leaves Nufarm underwhelmed

CHINESE state-owned chemicals group Sinochem's decision to lower its proposed cash takeover price for Nufarm from $13 a share to $12 a share ought to be a deal-breaker, but shareholders will have to wait a few days to see whether Nufarm's board is prepared to back up its rhetoric.

Sinochem approached Nufarm in July and the groups signed a

non-binding agreement for a $13 scheme of arrangement takeover on September 24.

The Chinese group had an exclusive window until December 3 to conduct due diligence and finalise the deal. Nufarm announced on December 1 that the deadline would not be met, but said that Sinochem had only raised a "relatively small number of issues" that had not affected the board's view of what price was required, and that Sinochem itself had not proposed a lower price.

That lower price, a $12-a-share one that values Nufarm at $2.6 billion, has now been tabled. And instead of ending the negotiation immediately, Nufarm's board has sought and received a share trading halt ahead of an expected announcement by December 29 following clarification of terms and conditions attached to the downgraded offer.

Nufarm's share price has been under pressure all year. But if the board is as good as its very recent words, it's difficult to see what bid conditions or terms would justify the board abandoning the $13-a-share benchmark.

Sinochem employed a small army of executives on due diligence, and it would have confirmed a slump in Nufarm's profitability this year, flowing from an equally abrupt slide in the price of its main product, the weed killer glyphosate, which in a normal year accounts for between 35 per cent and 40 per cent of international sales.

Supplies of the raw materials used to manufacture glyphosate were very tight in 2007 and 2008 and, after failing to satisfy customer demand due to raw material shortages, Nufarm bit the bullet in the final quarter of 2008, paying raw material prices that had risen by more than 400 per cent to underpin production in 2009. But even as it wrote the cheque, a lot of new production was being commissioned, notably in China.

Nufarm chairman Kerry Hoggard told the group's annual meeting on December 3 that Nufarm was not the only company in the glyphosate business to fail to foresee the new production but, for any company that missed it, the implications became evident very quickly. Global capacity that had been in deficit before the new facilities opened suddenly exceeded demand, and the price of glyphosate and its raw materials plunged.

Nufarm was caught holding what suddenly looked to be very expensive stocks, and in the United States rival producers snapped up cheap raw materials and converted them into cut-price weed killer that they sold direct to farmers and agribusinesses.

The glyphosate price fell by about two-thirds in the year to July, and by 50 per cent in the final six weeks of the financial year. Nufarm's global sales of the chemical were still sizeable, at $833 million, but its profit margin halved, from 31? in the dollar to 14.9?. It also booked write-downs on the value of its expensive raw materials, and earnings overall fell by 42 per cent in the year, from $138 million to $79.9 million.

Hoggard told the annual meeting that earnings in the first half of the current financial year would be significantly down on the profit of $65.7 million Nufarm posted in the first half of 2008-2009.

But the worst of the glyphosate downturn is over for Nufarm and it should not in any event have seriously deterred Sinochem, which is one of a stable of Chinese state-owned enterprises looking to lock in long-term production and raw material supplies, and would have been fully aware of the price slide and its implications for Nufarm in September when it launched its $13-a-share takeover proposal. Nufarm's profit margins are rising again, and the group's strategic position as one of the world's biggest suppliers of glyphosate is unchanged.

Yesterday, Hoggard said the board was disappointed that Sinochem had not confirmed a $13-a-share offer, would not support a proposal that undervalued the business, and would be reviewing all its options.

And with Sinochem's exclusive negotiating period over, those options include a deal with another industry player. Groups including Israel's Makhteshim-Agan Industries, India's United Phosphorous and industry giant Monsanto, are potential buyers, if not now, later but the question now is whether Nufarm's board will keep those options alive in the face of share price and shareholder pressure.

Through managing director Doug Rathbone the board speaks for up to 30 per cent of issued capital, but Nufarm served up three profit downgrades this year as the glyphosate price slump hit, and the profit slump has kept its share price below the original $13 takeover price since the initial takeover agreement was announced in late September.

The shares closed at $10.56 on Monday ahead of the trading halt. That's below the $11.25 paid in a $300 million placement last May by institutions that would still exit profitably at Sinochem's revised price of $12, even further below a one year high of $14.25, and a country mile from the all-time high of $18.10 a share in May 2008, when glyphosate was in short supply.