If you were a betting person (and which investor hasn’t been just that in the last 18 months or so), you’d have to be punting on further obstacles appearing in the way of the latest Chinese offer for rural chemicals group, Nufarm.
The market seems to be doing that.
Chinese investment in the mining sector seems to have triggered a variety of emotions and official reactions: from bans, to forcing changes in terms, to outright or eventual approval after modifications.
Some people complain about the lack of a worthwhile precedent to follow; others point out that the government has determined that it will treat every application on a case by case basis and that is what is happening.
So Chinese state-owned firm Sinochem in principle agreement to buy Nufarm for $2.8 billion is hedged with more than a few ‘maybes’.
The possibility of a bid has been public now since July, but coming on the day the company confirmed it would suffer a sharp fall in annual earnings of 40%, the timing of the offer looks like an attempt to sneak through on the back of bad news.
Nufarm has had three profit warnings this year and the share price has only been held up by the appearance of the Chinese at the door talking bid.
Nufarm CEO, Doug Rathbone will be happy: if the bid succeeds he will get over $300 million from the Chinese group in return for his 11% stake.
Nufarm said in the statement it had signed a heads of agreement with Sinochem whereby the Chinese firm would offer $13 per Nufarm share, a near 17% premium to Nufarm’s last traded price.
That seems a bit on the skinny side, given the lack of a strong market reaction.
The shares jumped to a day’s high of $12.22, up around 9%, before coming back to finish at $11.96, for a rise of 82 cents on the day.
That was a rise of 7.3%.
Perhaps it was the fact that the bid was revealed on a day when the overall market was weak, reacting poorly to the uncertain finish in New York on Saturday morning, our time.
The ASX 200 was down more than 50 points at one stage. It closed down around 36 points, or just under 1%.
But the lack of certainty on the approvals front would seem to be the major reason: too many investors have been burned by the federal government’s case by case approach.
The offer is subject to due diligence and regulatory approvals, including consent from Australia’s Foreign Investment Review Board which has stymied at least two major Chinese investments in Australia this year on national interest grounds.
"The execution… is subject to Sinochem being satisfied with the results of its due diligence enquiries and approval by Sinochem and the Nufarm board," the Nufarm statement added.
Nufarm said there was still no certainty a deal would proceed, despite its support for the heads of agreement.
It is the second time Nufarm has received an approach from a Chinese firm in two years.
In 2007, China National Chemical Corp, China’s leading chemical producer, led a $3 billion approach with US private equity firms Blackstone Group and Fox Paine Management, but they did not make a formal offer because the global credit crunch was rushing across the world when the proposed offer appeared in the last months of 2007.
“If a transaction implementation agreement is executed, the Nufarm board intends to unanimously recommend the proposed acquisition, in the absence of a superior proposal and subject to an independent expert finding that the proposed scheme is in the best interests of Nufarm shareholders,” Nufarm said in the statement.
One thing the board of Nufarm will have to overcome is any shareholder queries about whether this is a ‘cheap’ offer given the 42% fall in earnings in 2008-09 because the global recession and credit crunch cut farm credit in many of its markets.
Net profit fell to just under $80 million for the year to July 31, compared with 137.9 million a year ago. The latest profit was earned on a 7% rise in sales to $2.68 billion.
Despite the fall and the still uncertain outlook, CEO, Doug Rathbone said that “Directors are confident that the 2010 year will see an improvement in the quality of earnings and believe the company is well positioned to resume its strong profit growth.
"This result reflects a very challenging second half for the company, particularly with respect to its glyphosate business which suffered a sharp decline in profitability due to a range of issues that negatively impacted all of the world’s leading glyphosate suppliers in the final quarter of Nufarm’s financial year," directors said in the profit announcement.
"Significant material items related to adjustments associated with the company’s glyphosate business. The company booked a $40.8 million after tax write-down on the value of glyphosate inventory largely held in the US as at July 31, 2009.
"The adjusted value of that inventory places the company in a position to generate profits in the 2010 year while selling glyphosate at market competitive prices.
"The dramatic fall in glyphosate prices in the final six weeks of the financial year meant that the book value of inventory could not be recovered through sales made in the period. Losses of $22.7 million after tax have been classified as an inventory adjustment material item."
Directors declared a final unfranked dividend of 15 cents per share, resulting in a full year dividend of 27 cents. That’s down from the 35 cents a share paid for 2008.
Once again the Nufarm board has shown that it has a slightly different view to the optimism that sales and profits will pick up in 2010.
The interim dividend was steady at 12 cents a share and the final was chopped to 15 cents, from 23 cents. That’s a cu
