There comes a point where you have to stop throwing good money after bad.
That moment is already well past for Sinochem Corp. and China National Chemical Corp., or ChemChina, the state-owned Chinese giants that have been edging toward a merger for four years. The two chemicals companies are working on a structure that would allow them to combine without triggering a fresh round of foreign-ownership investigations over their Swiss-based Syngenta unit, the Wall Street Journal reported this week.
That’s a waste of effort and ingenuity. Rather than twist themselves into knots trying to honor the misguided strategy behind ChemChina’s $46 billion purchase, the pair need to cut their losses — and their debts. As my colleague Shuli Ren has written, state-owned enterprises are facing a wave of defaults and deleveraging. Meanwhile, offshore equity investors are hungry for fresh initial public offerings. Selling the seed company back into the international markets from which it was bought is the best way of killing all these birds with one stone.
The logic behind the 2016 acquisition was simple: The country has a fifth of the world’s population and just 7% of its agricultural land, so has to use about a third of the globe’s agricultural chemicals to feed itself. This is pushing its environment toward breaking point, as my colleague Clara Ferreira Marques has written. Diplomatic relations with major food exporters such as the U.S., Australia, and Brazil are difficult, so China needs to build its expertise in crop technologies and genetically modified seeds if it’s to have a hope of maintaining food security. The fate of the Soviet Union, which fell in part because of its dependence on imported grain, is a grim reminder of what could go wrong.
Put that way, the amount that ChemChina paid for Syngenta — the country’s biggest-ever outbound takeover — seems a small price to control one of the four companies that dominate the global market for seeds and crop chemicals.
The trouble is, it hasn’t worked. Five years after the deal was first proposed, Syngenta’s sales in its ostensible new home market are still a fraction of the total. Just $300 million of its $10.6 billion in crop protection sales last year came from China. In seeds, the total was $35 million out of $3.1 billion.
After years of food-safety scandals, China remains deeply skeptical about the genetically modified crops where Sygenta has an edge. One 2018 study found that 47% of people had a negative view of such products. Some 14% even considered them a form of bioterrorism. While the country imports substantial volumes of GMO foods from overseas, commercialization on domestic farms is still in its infancy, and attracts unusually strong public dissent. Meanwhile, most of Syngenta’s intellectual property remains back in Switzerland, so China hasn’t even bought itself a leg up the technological ladder.
At the same time, Syngenta’s ownership is a potential liability. Earlier this year, SinoChem and ChemChina were added to a U.S. government list of “Communist Chinese military companies” that could open them to crippling sanctions.
Financially, it’s a problem too. As we’ve written, SinoChem and in particular ChemChina are heavily indebted, with an aggregate 584 billion yuan ($89 billion) of net debt between them as of December 2019 — equivalent to an eyewatering 9.5 times Ebitda. Syngenta, whose $838 million of operating cashflows in the year represented almost half the total from Sinochem and ChemChina put together, is a dangerously tempting way to fill that gap. In 2018, the Swiss unit issued $4.75 billion in bonds and passed the proceeds straight up the chain to ChemChina as a dividend. While the terms of its acquisition prevent research and development spending being cut too aggressively, expenditure has been falling lately, while leverage has been rising.
Sticking with the current path risks leaving the three companies in the worst of all worlds — with Syngenta treated as a cash cow for its indebted parents, while its future prospects wither.
Another top-of-the-market Chinese takeover suggests a better option. HNA Group Co. will sell electronics distributor Ingram Micro Inc. to Platinum Equity for $7.2 billion, according to an announcement Wednesday, helping to dig the Chinese conglomerate from under the mountain of debt that fueled its mid-2010s takeover spree.
Something similar would work for Syngenta. At the 22.5 forward price-earnings multiple given to Corteva Inc., the seed-focused unit from the DowDuPont mega-merger, its $2.8 billion in net income in the year through June could command a market capitalization of around $63 billion — a hefty premium on the 2016 takeover price.
ChemChina has long planned to list the business on China’s stock market. Instead, Syngenta could be floated in the U.S., where scrutiny by foreign investment regulators will be less onerous, while keeping a share aside for domestic investors.
There’s no time to waste. Some $12.6 billion of ChemChina’s debt matures during 2021, four-fifths of it in foreign currencies. U.S. equity markets are in a feverish state, with Airbnb Inc.’s initial public offering this week capping $163 billion in new share sales so far this year. If SinoChemChina’s joint boss Frank Ning doesn’t act with haste.