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United Phosphorus
Stock Update
Acquisition presents opportunity to tap Brazilian market
Event
Untied Phosphorus Ltd (UPL) has entered into an agreement to acquire a 50%
stake in Sipcam Isagro Brazil (SIB) from Isagro. SIB is a 50:50 joint venture (JV)
between Sipcam – Oxon Group and Isagro. The deal will go through by Isagro exiting
the JV completely via a stake sale to UPL. Post the deal UPL and Sipcam will hold
50% each in the JV.
Deal contours
Owing to the confidentiality clause, the purchase consideration for the said 50%
stake has not been disclosed by UPL. Taking cues from Isagro’s presentation (Isagro
states that it expects to garner ~$50 million from the stake sale in its two JVs in
Brazil. Apart from SIB, Isagro has 50% stake in another JV called Isagro Italia), we
believe the consideration to be in the region of $25-$28 million, as both the JVs
have similar businesses and financial profiles.
Deal synergies
Three acquisitions by UPL: This is the third acquisition by UPL in less than a
year. The previous two being the acquisition of Mancozeb business brand Manzate
from Dupont in July 2010, and the acquisition of Rice Co LLF USA in December
2010.
Opportunity to kick start operations in the promising Brazilian market: The
deal marks UPL’s entry in the promising Brazilian market that is valued at $7.6
billion, with SIB enjoying a strong market share in crops like cotton and soybean.
UPL has less than 10% exposure to the high-growth Latin American agrochemical
market estimated at $7 billion and is ranked amongst the top five markets in
the world. SIB is a niche local producer and distributor in the Brazilian
agrochemicals market. It has a formulation plant in Brazil and has capabilities
in various formulation types for crop protection products. This coupled with
the high entry barriers that the market presents, makes the proposition a well
thought strategy by UPL to expand its operational base
and build some brand value in the Brazilian market.
Distribution of Isagro’s products to continue: Despite
the deal that would lead to Isagro’s exit from the JV,
UPL would continue to distribute Isagro’s products.
Thus the customer base and the product profile would
not have any dilution from the customers’ view. The
acquisition also presents a unique potential for UPL
to attain distributional synergies of its own products
via the JV’s network.
Valuations
We view the acquisition as a positive step in making UPL
a truly global agrichemical player. It would enable UPL to
enter the high-growth Brazilian market adding US$55
million (as per Isagro’s latest annual report, the JV posted
a top line of $109 million for CY2009) to its top line.
Further, though the details are not available, looking at
UPL’s historical track record and its acquisition target of
achieving payback in less than five years, we believe that
this acquisition would also have qualified the same
criterion. In view of the impending deal closure (expected
to close in one month’s time frame), we keep our
estimates unchanged and continue to have a bullish view
on the stock with a Buy recommendation and a target
price of Rs218. At the current market price, the stock
trades at 7.5x its FY2012E earnings.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
United Phosphorus
Stock Update
Acquisition presents opportunity to tap Brazilian market
Event
Untied Phosphorus Ltd (UPL) has entered into an agreement to acquire a 50%
stake in Sipcam Isagro Brazil (SIB) from Isagro. SIB is a 50:50 joint venture (JV)
between Sipcam – Oxon Group and Isagro. The deal will go through by Isagro exiting
the JV completely via a stake sale to UPL. Post the deal UPL and Sipcam will hold
50% each in the JV.
Deal contours
Owing to the confidentiality clause, the purchase consideration for the said 50%
stake has not been disclosed by UPL. Taking cues from Isagro’s presentation (Isagro
states that it expects to garner ~$50 million from the stake sale in its two JVs in
Brazil. Apart from SIB, Isagro has 50% stake in another JV called Isagro Italia), we
believe the consideration to be in the region of $25-$28 million, as both the JVs
have similar businesses and financial profiles.
Deal synergies
Three acquisitions by UPL: This is the third acquisition by UPL in less than a
year. The previous two being the acquisition of Mancozeb business brand Manzate
from Dupont in July 2010, and the acquisition of Rice Co LLF USA in December
2010.
Opportunity to kick start operations in the promising Brazilian market: The
deal marks UPL’s entry in the promising Brazilian market that is valued at $7.6
billion, with SIB enjoying a strong market share in crops like cotton and soybean.
UPL has less than 10% exposure to the high-growth Latin American agrochemical
market estimated at $7 billion and is ranked amongst the top five markets in
the world. SIB is a niche local producer and distributor in the Brazilian
agrochemicals market. It has a formulation plant in Brazil and has capabilities
in various formulation types for crop protection products. This coupled with
the high entry barriers that the market presents, makes the proposition a well
thought strategy by UPL to expand its operational base
and build some brand value in the Brazilian market.
Distribution of Isagro’s products to continue: Despite
the deal that would lead to Isagro’s exit from the JV,
UPL would continue to distribute Isagro’s products.
Thus the customer base and the product profile would
not have any dilution from the customers’ view. The
acquisition also presents a unique potential for UPL
to attain distributional synergies of its own products
via the JV’s network.
Valuations
We view the acquisition as a positive step in making UPL
a truly global agrichemical player. It would enable UPL to
enter the high-growth Brazilian market adding US$55
million (as per Isagro’s latest annual report, the JV posted
a top line of $109 million for CY2009) to its top line.
Further, though the details are not available, looking at
UPL’s historical track record and its acquisition target of
achieving payback in less than five years, we believe that
this acquisition would also have qualified the same
criterion. In view of the impending deal closure (expected
to close in one month’s time frame), we keep our
estimates unchanged and continue to have a bullish view
on the stock with a Buy recommendation and a target
price of Rs218. At the current market price, the stock
trades at 7.5x its FY2012E earnings.
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