We believe Syngenta’s deal with ChemChina will close as planned and the shares, at a 20% discount to the agreed upon cash price, represent a good investment.
Business Description: Syngenta is a global pesticide, fungicide, herbicide, and seed provider.
Investment Thesis: ChemChina has agreed to acquire Syngenta for $93 per share in cash plus a 5 CHF dividend at the close. The deal is approved and recommended by the Syngenta board. Both companies say it will close by the end of 2016- Syngenta reiterated it last week on their earnings call. The main hang up is that the deal is subject to a Committee on Foreign Investment in the United States (CFIUS) review by the United States Treasury as Syngenta owns 15 facilities in the United States. Given that Smithfield (25% market share in pork) was allowed to be acquired by the Chinese in 2013, we think there is a high probability this deal will also go through.
The merger agreement allows ChemChina to walk away from the deal without paying a $3 billion reverse breakup fee on account of a “Regulatory MAC” if CFIUS (or any regulatory body outside of China) requires them to divest assets generating more than $2.8 billion (~20%) of revenues. Total North American sales for Syngenta are $3.4 billion so the sale of any one facility is not going to meet the “Regulatory MAC” criteria.
CFIUS has historically denied transactions on a few grounds. 1) If there is significant military technology involved CFIUS has often denied sales to governments it doesn’t like 2) If facilities are too close to military bases.
We do not think there is significant military technology in the Syngenta business. It should be noted that China has signed a chemical weapons treaty with the UN and all its facilities are actively monitored.
In terms of U.S. facilities, Syngenta has only 3 production facilities of size (greater than 5,000 square ft.). St. Gabriel, Louisiana; Greens Bayou, Texas; and Woodland, CA. The St. Gabriel plant is 5 miles from a small national guard base/armory – the Gillis Long center. This is a training center primarily for wayward youths – not exactly a strategic base. There is no restricted airspace over this base or anything like that. (The last China deal to be rejected for proximity to bases was the Ralls wind farm in restricted airspace in 2012). The Greens Bayou facility is basically in a Houston industrial park on the outskirts of town with no nearby military bases. The prior two appear to be chemicals plants. The CA facility is in rural California with nothing nearby. This is a seed facility.