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ChemChina-Syngenta $43 billion deal approved by U.S. security panel

August 22, 2016
Energy & Chemical Value Chain

China Inc.’s global ambitions cleared a big hurdle after the U.S. national-security regulator approved China National Chemical Corp.’s planned $43 billion takeover of Swiss seed giant Syngenta AG.

The decision in favor of China National Chemical, or ChemChina, comes amid growing opposition to Chinese investment from Europe to Australia. If completed, it would be China’s largest overseas acquisition to date.

The industry had been watching for a decision from the Committee on Foreign Investment in the U.S., or CFIUS, a government body with the power to block deals it deems a threat to the nation’s security, because about a quarter of Syngenta’s sales come from North America.

While analysts and Chinese industry officials hailed the decision as a major step forward for what would be a landmark Chinese takeover, the deal still faces potential roadblocks from regulators in the European Union.

ChemChina’s deal for Syngenta is significant not only for its size, but also what it represents for China. Acquiring the Swiss seed and pesticide giant’s intellectual property would be hugely valuable for China as it seeks to feed a growing middle class and modernize its sprawling agricultural industry.

It would also serve to support the government’s push to win state-owned enterprises greater access to lucrative overseas markets including the U.S.

The Chinese chemicals industry celebrated the U.S. decision, which was announced Monday in a joint statement by the companies. The deputy secretary-general of the state-backed China Petroleum and Chemical Industry Federation, Pang Guanglian, described the U.S. approval as a key hurdle to closing the deal.

“This is a very important step for ChemChina,” said Mr. Pang. “The likelihood that the European Union will pass this is huge.”

Syngenta’s stocked rose nearly 11% in Zurich as of midday Monday.

“The CFIUS approval removes a major potential hurdle and should come as a relief to Syngenta shareholders,” said Christian Faitz, co-head of chemicals research at brokerage Kepler Cheuvreux.

U.S. lawmaker Sen. Charles Grassley (R., Iowa) had expressed concern about how the deal would affect U.S. food security, and had sought a formal role for the U.S. Department of Agriculture in CFIUS. The Treasury-led committee is made up of representatives from 16 U.S. departments and agencies including the Treasury, Homeland Security and Defense Departments.

In Europe, regulators are expected to scrutinize the deal’s effects on the crop-protection chemicals industry given that ChemChina owns a majority stake in Adama, a large insecticide and weedkiller supplier in the region along with Syngenta and Dow Chemical Co., according to Bernstein Research.

ChemChina and Syngenta say they expect the deal to close at the end of 2016. That might be optimistic, given the European Commission’s scrutiny of the consolidating crop-protection space, according to Jeremy Redenius, a senior analyst at Bernstein Research.

The European Commission has opened a full-blown investigation into the proposed merger of Dow Chemical and DuPont Co., looking at whether the deal will reduce competition in the crop-protection and petrochemicals space.

If European regulators take issue with the deal, Syngenta and ChemChina can resolve antitrust concerns by selling assets, according to Mr. Redenius.

While lawyers say a deal between Syngenta and ChemChina would be fairly complementary, there may potentially be other hurdles in an EU review of the deal.

As it has done in previous cases involving Chinese buyers with ties to the State, EU antitrust regulators are likely to conduct an audit to determine which other Chinese state-owned companies active in the agrochemical sector would have to be grouped in with ChemChina. If considered to be part of a wider group of companies, that could then increase the possibility of ChemChina’s overlaps with Syngenta.

“You could have a fight over the company analysis because it’s not always clear how much control the Chinese state has over a particular company and whether the state coordinates that company’s activities with the other Chinese players in the sector,” said David Anderson, a Brussels-based antitrust partner at Berwin Leighton Paisner LLP, who has previously represented a Chinese state-owned company that had to undertake a similar audit.

As the deal has awaited regulatory approval in the U.S. and elsewhere, ChemChina has also pushed ahead to secure funding.

ChemChina’s advisers, HSBC Holdings PLC and China Citic Bank International have provided financing for the entire $43 billion bid. Bankers are working to put in place longer-term funding for the company by farming out some of the debt to other banks and selling shares in Syngenta to co-investors.

This week, ChemChina plans to sign a $12.7 billion syndicated loan agreement with more than 10 banks to help fund the deal, according to people familiar with the situation.

Chinese companies are on a spending spree—signing $159.2 billion in overseas deals so far this year, surpassing the record amount in the full-year 2015, according to Dealogic.

The shopping spree by China comes amid urgency inside its labyrinth of state-owned enterprises to diversify their sales streams as China’s economy slows.

Some governments are concerned. Australia said this month it would blockState Grid Corp. of China and Hong Kong’s Cheung Kong Infrastructure Holdings Ltd. from taking a controlling stake in the country’s biggest electricity network.

In another case, the U.K. government under new Prime Minister Theresa May said it would delay a final decision on building a nuclear-power plant partly funded by a Chinese state-owned company.

ChemChina’s deal for Syngenta marked a bold move onto the global stage by the Chinese company, whose ambitious founder and chairman, Ren Jianxin, has for years looked to raise its international profile. The company also said last year it was acquiring Italian tire maker Pirelli & C. SpA for around $7.7 billion.

By Brian Spegele and Kathy Chu

Source: Wall Street Journal

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