China National Chemical Corp’s (ChemChina, 中國化工) US$43 billion deal to buy Syngenta AG is dividing credit rating agencies on whether the company’s acquisition spree would load it with too much debt.
State-backed ChemChina is borrowing US$50 billion for the purchase that would make it the world’s largest supplier of agricultural chemicals, people familiar with the matter said.
The Beijing-based company’s debt-to-equity ratio was 260 percent on Sept. 30 last year, more than four times the average of 61 percent for global agricultural chemical producers, data compiled by Bloomberg showed.
“The Syngenta acquisition will lead to higher debt loads, which will have a negative impact on ChemChina’s financial health,” Moody’s Investors Service senior analyst Zou Jiming (鄒吉明) said in Shanghai. “The government support would mitigate, but likely not fully offset the standalone risk of higher leverage after the Syngenta acquisition.”
The announcement of the deal divided assessors, with Moody’s placing ChemChina subsidiary China National BlueStar Group Co (中國藍星集團) under review for a downgrade, while Fitch Ratings Inc put it on positive watch.
The split comes amid concern state-owned enterprises are accumulating too much debt.
“ChemChina’s leverage might increase, primarily depending on the final funding structure, but we believe the acquisition of Syngenta would raise ChemChina’s overall strategic importance to the Chinese agriculture and food industry, as Syngenta is the world’s third-largest seed company and one of the four dominant producers of genetically modified seeds,” Fitch Shanghai-based analyst Stella Wang (王曉穎) said. “This would strengthen the linkages between ChemChina and the Chinese government.”
The government would probably support the acquisition due to ChemChina’s “high-leverage position” and the strategic importance of agriculture, Wang said.
Enhancing crop yields is crucial, as the nation has more than 20 percent of the world’s population with less than 10 percent of its arable land, Fitch wrote in a statement last month.
Yields are now more than 40 percent lower than those of most Western nations, the statement said.
ChemChina has announced US$47.3 billion of acquisitions this year, including pending takeovers, a jump from US$8.9 billion last year and US$1.4 billion in 2014.
Chinese companies have announced US$72.6 billion of offshore acquisitions valued at US$1 billion or more this year, compared with US$73.6 billion in all of last year, as a slump in exports fuels yuan depreciation expectations.
The yuan has weakened 3.6 percent against the US dollar over the past year.
“ChemChina’s standalone weak financials show it doesn’t have the capacity for the Syngenta deal,” Standard & Poor’s Financial Services LLC Hong Kong-based analyst Lawrence Lu (盧文正) said. “It is likely to get government support for the Syngenta transaction, because the agriculture sector is one of the most important in China.”
ChemChina’s debt was about 9.5 times its earnings before interest, tax, depreciation and amortization in 2014, while the average of its global peers was only 2.3, according to data compiled by Bloomberg.
It had total debt of 156.5 billion yuan (US$24.1 billion) on Sept. 30 last year, exceeding cash and cash equivalents of 29.8 billion yuan, Bloomberg data showed.
ChemChina bought or invested in assets in Italy, France, Norway, Britain and Singapore in the past few years, including tiremaker Pirelli & C SpA.
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