The acquisition of Mancozeb from Du Pont augurs well for the company’s product mix.
With the acquisition of Mancozeb, a broad-spectrum contact fungicide (from Du Pont), United Phosphorus (UP) has strengthened its position in the global fungicide business. The company is now the second-largest player in the $500-million global Mancozeb market.
With valuations tempering down in the current market situation, analysts expect the company to pay $70-$100 million for the acquisition. This works out to a valuation of around 1.5-2 times sales and is considered to be reasonable. The payback period is expected to be around three to four years. The company is cash rich and has a war-chest of around Rs 1,800 crore.
Moreover, the $40-billion global agri-chemical industry is highly structured, with top six players accounting for 28 per cent of the patented market and 32 per cent of the non-patented market; global generics players account for around 40 per cent. Incidentally, with $3-4 billion worth products likely to go off patents, the market for generic players (like UP) is set to expand. UP has shown the inclination to increase its share in the fungicide market and had picked up Carexagri in November 2006. With the current acquisition, the share of fungicides is likely to go up to 33 per cent from 28 per cent in 2008 and the share of insecticides may fall from 31 per cent to 25 per cent.
Moreover, Manzante has a strong presence and acceptance in the US market and has gross margins of around 33 to 35 per cent. UP’s operating profit margins range 19-21 per cent; they are likely to rise 100-200 basis points with this acquisition. The company has managed to maintain margins and volumes even in a sluggish market. International markets now command around 80 per cent of its revenues. At the moment, the company remains vulnerable to raw material prices, which could be one of the key risks to profitability. Also, the ability of the management to integrate operations and get the same brand acceptance as Manzante got through Du Pont would be another key determinant.