Companies look for consolidation; PE investors see opportunity in the sector
The Indian farmer is once again causing a stir across corporate boardrooms. For fertiliser and agrochemical companies, the question is as basic as a seed. If the end consumer of their product is the same, doesn’t it logically make sense to blur the turfs between the two?
If the process took baby steps in 2009 when Tata Chemicals consolidated Rallis within its balance sheet, the acquisition of Sabero Organics by Murugappa Group’s Coromandel International may well be the tipping point, feel most analysts.
| FARMER IS KING | ||
| FINANCIAL | ||
| PE Funds | Company | Value ($ mn) |
| Henderson Equity | Sharda Worldwide | 25 |
| Standard Chartered PE | PI Industries | 10 |
| Blackstone | Gharda Chemicals (Aborted) | 130+ (reported) |
| STRATEGIC | ||
| Buyer | Target Company | Value ($ mn) |
| Coromandel International | Sabero Organics | 90 |
| Arysta Lifesciences | Devidayal Sales | NA |
The farmer is clearly the king. The dynamics of the business is guiding the decision to merge. Being a regulated sector, fertiliser companies see limited growth potential and technology driven agrochemicals is a natural and logical diversification. The objective is to leverage on the existing distribution reach to deliver “branded agrochem products” to the end consumer or the farmer.
“You have to be a full service provider to the farmer. We were in pesticides, but migrated to seeds. Everybody is trying to build cross-selling capabilities,” says Rajju Shroff, CMD of United Phosphorus, India’s largest agrochem player. “Consolidation that will ensure intelligent, ethical competition will be good for the sector.”
Murugappa Group Executive Chairman A Vellayan said the acquisition was part of a strategy of the company to grow its non-subsidy businesses, including the profitable pesticides vertical in India and export markets.
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Sabero, a producer of fungicides, herbicides, insecticides and speciality chemicals has operations across three continents of Europe, Latin America and Australia, besides a manufacturing facility in Gujarat. It boasts of 240 product registrations internationally for its key products. Half of its turnover comes from exports.
Coromandel, too, historically had an agrochemicals presence, but this acquisition shows their intent to emerge as a leading player.
“Both sectors have sizeable marketing synergies. However, limited synergies exist at manufacturing level. Also, both sectors have considerably different capital expenditures. Potentially fertiliser capexes are 10 times that of agrochemicals, and hence, generally we have seen different sets of entrepreneurs doing both businesses,” said Navroz Mahudawala, MD of boutique advisory firm Candle Partners.
Just like pharma, the regulated markets of the US and Europe are becoming increasingly tough for smaller Indian players to crack.
“Only two or three Indian companies are registered in the US and Europe. Most of the local companies are still small and it's difficult for them to pursue global growth just yet. Even among the MNCs, only a handful of pure marketing players are focusing on such strategy,” pointed out R V Bubna, CMD, Sharda Worldwide, a global agrochemical player.
No wonder the space is attracting financial and strategic investors. (See box: Farmer is King) Globally too, PE investors are increasingly seeing value in this sector. In October 2007, global PE player Permira bought out Arysta for $2.2 billion.
So, will India be a deal magnet? Analysts say, the agrochem players who are grappling with high acquisition-led leverage since 2007-08 can be potential targets for the big boys to spread their roots.