Description

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.

All Syngenta facilities from 20-F report:

From (https://www.treasury.gov/resource-center/international/foreign-investment/Documents/Annual%20Report%20to%20Congress%20for%20CY2014.pdf) The criteria CFIUS looks at when evaluating deals is as follows:

So, yes, there are assets in the U.S. being sold to a company under Chinese control, so this deal is certainly subject to CFIUS, but knowing the criteria, how are seeds and pesticides/herbicides really going to pose a threat to national security?

In terms of actual historical CFIUS reviews only about 10% of deals get withdrawn (almost none get rejected as they tend to be withdrawn if there is a problem).  From the CFIUS annual report to Congress (link above):  

The market seems to be ascribing a much higher than 10% chance of CFIUS rejection to this deal and we think it is unwarranted.  

Why else could this spread be so wide?

Maybe people fear ChemChina won’t be able to fund the deal, but they already have committed financing and are in the process of raising equity, so we don’t view this as realistic concern.

Another reason we think the spread is so wide for this deal is that no one is “the expert” in the merger arb involving the acquisition of a Swiss company by a Chinese company subject to a CFIUS review.  We think this higher degree of “uncertainty” among the usual suspects probably accounts for a portion of the spread.

Risks:

• The biggest risk is that the deal could take a while to close, potentially longer than the companies think.

• The CFIUS process is murky (no information is disclosed).  The company may have to refile several times to gain approval.  To the extent there is a different president in office (e.g. Trump), approval may be more difficult if the deal extends beyond the election.  The POTUS is the one who grants final approval or denial of deals after CFIUS makes a recommendation.

• If the deal breaks SYT will probably trade lower.  SYT “undisturbed” is probably worth ~$66 based on comps, etc.  However, MON bid ~$90 and may wish to re-enter the fray if the deal breaks (especially with Bayer pursuing them).  SYT is definitely still “for sale” if the deal breaks so it will probably stay somewhat above the undisturbed price.

Catalyst

ChemChina deal closes.