|Ren Jianxin (left), chairman of ChemChina, with Syngenta's chairman|
Michel Demaré at the announcement in February 2016
Word reaches us that the $46 billion acquisition of Syngenta by ChemChina will close on Thursday, about 15 months after its formal announcement. Even as it staggers to the finish line, it already looks like a throwback.
A lot has changed in the year or so since ChemChina made a cash offer for the Swiss seed and chemical company in February 2016.
Then, the bid represented the high point of Chinese outbound largesse, though at the time its size was not particularly out of place and its rationale looked a hell of a lot stronger than some of the other weird and wonderful deals being proposed.
This was a time when the lexicon of M&A was being rewritten, with reverse break fees and the ‘random Chinese buyer’ becoming industry tropes.
Now, though, it looks like the sort of deal we might not see again for a long time.
Change of attitude
Late last year, Chinese state institutions changed their attitude towards capital leaving the country and made it a lot harder for deals to gain approval.
M&A bankers insist that the right sort of deals can still get away from China, but not like before: nothing as big as ChemChina/Syngenta; nothing with its financing as opaque and occasionally uncertain as ChemChina’s appeared to be – regulatory filings show China Citic Bank put up $30 billion of loans to get the deal through, and the company then sought equity investment from sources as diverse as private equity and the Silk Road Fund, before settling on a $5 billion investment from another Citic affiliate.
As one deadline after another lapsed, the deal came to be representative of Chinese state-owned enterprises overstepping, in terms of scale, indebtedness and sheer ambition. But the problems weren’t all on the Chinese end: much of the delay had to do with regulatory approval in Europe, and the deal took so long to grind its way through that the whole debate around national interest changed worldwide during its gestation.
These days, it is said that the European Commission now looks at SOEs from China in aggregate in making an antitrust decision – so, for example, in a CNPC purchase in Europe, CNPC’s position would be rolled together with Sinopec and CNOOC in the EC decision – which moves the goalposts and makes accurate filing difficult.
But the deal did get done. It is a landmark. And is it a certainty that China would do it differently if it had its time again? Not at all.
For a start, China hasn’t banned outbound M&A. The relevant regulators – principally the People’s Bank of China, the State-owned Assets Supervision and Administration Commission, the National Development and Reform Commission and the State Administration of Foreign Exchange – have said that deals worth $10 billion or more will from now on be hard to approve, but they will still be considered when there is great strategic importance to it.
Consider what ChemChina-Syngenta is really about: it’s not just the chemicals, it’s the seeds, and few things are considered more strategically important to China than food security.
Also, it was there to be bought.
“Timing is everything at the moment,” says one person familiar with the deal. “When you look at how things have evolved in the last 12 months, with Trump and Brexit, the windows you have to undertake these transactions are few. If you don’t take them, you may never have another shot at it.”
It looks likely that the Syngenta acquisition, iconic though it is, will be just a curtain-raiser to another colossal piece of M&A: the merger of ChemChina with Sinochem. Euromoney called this in November, and as the Syngenta deal reaches the finish line, the idea is being talked about more widely.
It won’t make much difference internationally – particularly for bankers (domestic state-owned consolidations carry no meaningful fees) – but it does represent a moving of pieces around the board on China’s part, where a company with great international assets but only modest strength at home (ChemChina) will be merged with a much stronger domestic business better able to make use of those international assets (Sinochem).
The deal’s conclusion does mean that the notorious break fees – said to be $3 billion for ChemChina, $1.5 billion for Syngenta – will not be exercised. It also means the bankers involved – HSBC and China Citic Bank International for ChemChina; JPMorgan, Goldman Sachs, Dyal Co and UBS for Syngenta – get to talk about something else for a while.
This was a long time coming.