Arysta buy to make UPL the world's fifth largest crop protection company

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

Acquisition of Arysta Life Sciences, a part of the US-based Platform Specialty Products, if it goes through will make UPL the world's fifth largest crop protection company and the largest generic player with combined revenues of slightly lower than $4.6 billion. The company is currently the ninth largest with annual revenues of $2.7 billion. 

While the company is not commenting on the acquisition reports, if the deal goes through the key benefit according to analysts at Citi Research is the higher scale which will help in distribution both 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 a presence in more geographies and benefit from market access. 

UPL has been following the inorganic route provided the products and the price is 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 Rs 270 billion), the deal pegs the valuations at 10.3 times enterprise value to operating profit. Given that typically UPL looks at 5-6 times, the reported valuations appear to be on the higher side.

UPL has a consolidated gross debt of Rs 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 impact earnings. Assuming 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 Rs 140 billion. Accounting for internal accruals, the company may have to take a debt of about Rs120 billion pushing the debt to equity to 1.8 times. This could be earnings dilutive in FY20 to the tune of 11 per cent, while if valuations are a more reasonable 6 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.