Arysta buy to take UPL to global top 5 in crop protection

Proposed deal offers multiple synergies, though reported valuations are too high for comfort

If the acquisition of Arysta LifeScience (a part of the USbased Platform Specialty Products) goes through, it will make UPL the world's fifth largest crop protection company and the largest generic player, with a combined revenue of slightly lower than $4.6 billion. The company is currently the ninth largest with an annual revenue of $2.7 billion.

The company did not comment on the acquisition. But, if the deal is finally sealed, the key benefit, according to analysts at Citi Research, would be that it will operate on a higher scale that will help in distribution - for getting better terms from distributors as well as the ability to offer a wider portfolio of products to customers.

Further, given the strong manufacturing base of UPL, sourcing costs will be reduced as Arysta gets most of its raw materials from India and China. A strong supply chain can then be integrated with Arysta, which has presence in more geographies, and UPL will benefit from market access.

The firm has been following the inorganic route, provided the acquired product portfolios and the valuations are right. However, while the product and market synergies seem to justify the acquisition, the pricing seems to be at the higher level. At the acquisition price of $4 billion (or ~270 billion), the deal pegs the valuations at 10.3 times enterprise value (ev) to operating profit. Given that UPL typically looks at acquisitions with valuations in five-six times ev to operating profit range, the reported valuations appear to be on the higher side.

UPL has a consolidated gross debt of ~65 billion, with debt to equity at 0.6 times. While there is scope to increase leverage a bit, analysts at Emkay Global believe that higher debt will affect earnings. Assuming that the company does not dilute on the equity side, UPL's contribution to the deal for a 51 per cent stake stands at just under ~140 billion. Accounting for internal accruals, the company may have to take a debt of about ~120 billion, pushing the debt to equity to 1.8 times. This could be earnings dilution in FY20 to the tune of 11 per cent, while if valuations are a more reasonable six times, the negative earnings impact would be just 3 per cent.

While the two companies complement each other at the operating level, valuations of the deal hold key. The Street, in addition to the muted performance in FY18, is perhaps is also worried on the valuations for the acquisition.