Chinese state-owned Sinochem bid $2.5 billion for Australian farm chemicals group Nufarm Ltd on Monday, looking to gain a global footprint in a deal that could again test investment ties between China and Australia.
The bid sent Nufarm shares up 7.4 percent to A$11.96, some 8 percent below the A$13 a share offer price, reflecting concerns that the long-awaited deal still has many hurdles to clear, including due diligence and both shareholder and regulatory approvals.
The major regulatory risk is Australian foreign-investment approval, which has been difficult to predict, especially when state-owned Chinese firms seek to take control of local assets.
There could be issues, but I think on balance it should be ok, said Paul Xiradis, chief executive of fund manager Ausbil Dexia, arguing Nufarm did not raise the same national interest concerns as China's recent mining investments.
Australia's Foreign Investment Review Board (FIRB) has stymied at least two major Chinese investments in Australia this year, both involving local firms that own large mineral deposits.
In contrast, Nufarm is in the manufacturing industry where the foreign investment regime has generally been more liberal.
It should be quite a do-able transaction from the FIRB's point of view, Xiradis said.
The main attraction for Sinochem is Nufarm's global distribution network, which includes businesses in Asia, South America and Europe, analysts say.
Nufarm first disclosed Sinochem's interest in July and the company told an analysts briefing on Monday that it has not spoken to any counter bidders since then.
Whether it succeeds at that price, it's hard to say, but I don't think there's going to be too many counter-offers. It has been known that Nufarm is potentially up for sale and no one else has come to the party at this point, Xiradis added. Ausbil owns Nufarm shares, but declined to divulge the holding.
Analysts have previously mentioned United Phosphorous Ltd and Makhteshim-Agan as potential rival bidders.
Bank of America/Merrill Lynch had speculated that an offer between A$14-A$16 a share would be accepted by the board.
Nufarm reported a 2.6 percent drop in net profit on Monday and flagged a challenging operating environment in the current year. That cautious outlook could be part of the reason for the lower-than-expected bid, analysts said.
Rating agency Standard & Poor placed Nufarm's BBB-minus rating on credit watch with negative implications following the announcement.
CHINA ON THE PROWL
Resource hungry China has been looking to buy Australian mining companies, including a $2.9 billion bid by state-owned Yanzhou Coal Mining Co for Felix Resources Ltd.
Last month, China's biggest steelmaker Baosteel agreed to buy a 15 percent stake in iron ore explorer Aquila Resources Ltd for $240 million.
So far this year, Chinese companies have invested about $5 billion in Australian companies.
China is Australia's biggest export market, with two-way trade worth $53 billion last year.
Nufarm said there was still no certainty a deal would proceed, despite its support for the heads of agreement.
It is the second time Nufarm, which describes itself as the world's ninth largest crop protection company in the world, has received an approach from a Chinese firm in two years.
In 2007, China National Chemical Corp, China's leading chemical producer, led a A$3 billion approach with U.S. private equity firms Blackstone Group and Fox Paine Management, but they did not make a formal offer.
Nufarm is being advised by UBS, while the Royal Bank of Scotland is advising Sinochem.
($1=1.153 Australian Dollar) (Additional reporting by Victoria Thieberger; Editing by Mark Bendeich & Lincoln Feast)