China’s chemicals deal may have come too late

Better late than never?
Three years of efforts to combine China’s giant state-owned chemicals companies Sinochem Group Co and China National Chemical Corp, or ChemChina, may finally be paying off. A merger between the two unlisted companies is at last “in progress,” Frank Ning, the chairman of both companies, said last week.
Such a deal would create a behemoth with about 1.04 trillion yuan ($152.2 billion) of revenue. If it was ever listed, that might result in a market capitalisation of 777 billion yuan on the 0.75 times price-sales multiple typical of large chemical businesses — roughly the size of BASF SE, Dow Inc, and Nutrien Ltd put together.
Size isn’t everything, though, and any completed SinoChemChina deal is likely to look less like a triumph than a limp to the finish line. The reason is ChemChina’s vast and growing debt mountain. Since its $43 billion takeover of Swiss crop-science giant Syngenta AG at the height of China’s outbound acquisitions spree in 2017, the company’s borrowings have only grown, thanks to ongoing capital spending far in excess of operating cashflow.
The $20 billion that funded the Syngenta deal looks modest next to net debt which stood at 434.23 billion yuan, or $63.6 billion, at the end of June.
Operating income barely covers the interest bill and the company hasn’t made a profit since the takeover was completed. Despite hopes that owning one of the world’s crop giants would allow China to drastically increase the productivity of its domestic farming industry and food security, Syngenta’s mainland sales have barely risen, with the biggest jump in revenue coming from Latin America. No wonder’s China’s ambassador to Switzerland labeled the takeover a mistake.
A spinoff will go some way towards winding back the debt clock. Ning has already been working to combine ChemChina and Sinochem’s agricultural assets into a vehicle that would be suitable for listing on mainland exchanges. Pre-IPO financing from state-backed investors could provide $10 billion in return for 20% to 30% of the company, Reuters reported last year citing people familiar with the situation.
If a similar amount could be raised from smaller shareholders, SinoChemChina could end up with $20 billion while still holding onto a majority stake in its listed agritech business.
There’s no time like the present to get that long-awaited initial public offering done. China’s equity markets are in a frothy state these days — perfect conditions for raising cheap money.

—Bloomberg