Is agribusiness the next boom? 5:41 AM Nov 6, 2007
A year ago Nufarm was valued by the market at less than $1.6 billion. About a week ago, as reports of an imminent offer broke, it was worth about $2.3 billion. Yesterday, it received a takeover proposal from a state-owned Chinese chemical company and two private equity groups that values it at $3 billion.
The escalation in Nufarm’s value could be explained by some peculiar intrinsic or strategic value if it weren’t for the even more dramatic rise in Incitec Pivot’s market capitalisation from $1.3 billion to $4.4 billion over the past year. While one is an agricultural chemicals company and the other primarily a fertilizer company, they have sufficient in common that Incitec looked at bidding for Nufarm earlier in the year before switching its attention to Dyno Nobel.
The obvious commonality is that they are both focused on supplying commodities that boost farm productivity. That appears to be a good place to be in at this moment. The approach to Nufarm from China National Chemical Corporation, Blackstone Group and Fox Paine Management came a little over a week after a $US2.2 billion ($A2.4 billion) buyout of Japan’s Arysta LifeScience – the 10th-largest agrichemicals company in the world.
The not-so-little flurry of strategic activity in the sector poses an interesting question. Are we now seeing a structural change in the markets for agricultural commodities and the industries that support them that is analogous to the China-inspired boom in the resources sector?
There are some influences that are very similar. The biggest part of the explanation for the resources boom has been the remarkably rapid industrialisation of China and to a lesser extent India, with developing economies in South America and Eastern Europe also starting to have an impact. There has been a massive change in the supply/demand equation for natural resources.
Something similar is happening, it appears, in agriculture. The increased affluence in the developing countries is creating increased demand for food, particularly energy-intensive foods. The ability of the market to absorb that demand is being constrained by droughts/climate change and limits to the availability of more arable land.
The climate change impact is magnified by the massive shift towards biofuels. In the US, plantings of corn for ethanol production is forecast to rise more than 20 per cent this year.
Just as the mining services companies have been major beneficiaries of the resources boom, pesticide and fertilizer companies ought to be leveraged to any structural shift in agricultural commodity markets.
The involvement of private equity in the Nufarm and Arysta buyouts suggests they believe agribusiness could be facing the same kind of 'stronger for longer' cycle that has transformed the resources sector.
Incitec Pivot provides a graphic illustration of how rapidly conditions are changing. It acquired Southern Cross Fertilisers from BHP Billiton for $165 million in May last year. Southern Cross was regarded as a non-core asset by BHP, which picked it up when it bought WMC. That ownership went back a long way - WMC gained control of the Queensland project when it bought BH South in 1979 and held onto it for decades it in the belief/hope that it would one day be a strategic asset.
The Incitec acquisition was the final element of a complex buy-out of Incitec’s majority shareholder, Orica. Orica sold most of its 70 per cent holding at $21 a share, with Incitec buying back the remaining 13.5 per cent at the same price. Incitec shares closed at $88 yesterday.
Not all of the increase relates to the Southern Cross acquisition and even that part of it that does isn’t necessarily all windfall – Incitec has extracted very substantial synergies at a rate that appears to have surprised even the company itself. A rise in the diammonium phosphate price from about $US270 a tonne to around $US440 a tonne, however, has been a very significant factor -- every $US10 a tonne increase in the price translates to almost $US10 million of increased earnings.
If there is a long-term structural change in the markets for agricultural commodities occurring, Incitec’s prescience in acquiring for a relatively modest sum a project that had previously promised much but never delivered would give it a nicely leveraged exposure to the escalating demand.
Nufarm shareholders ought, even if no further bid emerges, to be pleased they have nearly doubled their money in a year. Incitec shareholders, however, have quadrupled theirs without having to sell their company.
