An agreement to try to agree: Nufarn and Sinochem
NUFARM and the state-owned Sinochem have laboured long and hard to produce an unusual document — a heads of agreement for a “non-binding” proposal to acquire the Australian-based international agrichemical group.
Nufarm first announced a preliminary approach by Sinochem in July and since the parties have been negotiating, with Sinochem permitted to carry out extensive due diligence.
If the deal proceeds it will be by way of a scheme of arrangement.
At this stage of the process, the parties normally have signed a binding implementation agreement. But what Nufarm and Sinochem have signed is no more than an agreement to try to reach agreement. There is, as yet, no firm deal.
As the document says the agreement describes “a preliminary, non-binding indication of interest to explore the proposed transaction and shall form the basis of a negotiation of the more transaction implementation agreement”.
If a binding agreement is signed the Nufarm directors propose to recommend the proposal, in the absence of a superior proposal and subject to an independent expert finding that the offer is in the best interests of Nufarm shareholders.
Not surprisingly therefore, the market has reacted cautiously at this stage. Nufarm’s share price rose 82c, or 7 per cent, yesterday to $11.96 — $1.04, or 8 per cent, below the proposed offer price of $13 a share. That reflects uncertainty as to the status of the “offer”, and perhaps also uncertainty as to whether the Federal Treasurer Wayne Swan will grant foreign investment approval.
An offer at $13 a share would represent a premium of 50 per cent on the ASX price at the time the negotiations were revealed in July. It also represents a multiple of just 12 times normalised EBITDA and 18.6 times that of actual 2009 earnings, reported yesterday.
By way of comparison, the Bayer-Aventis acquisition was at an EBITDA multiple of 10.4 times and the BASF acquisition of Fipronil at a multiple of 10.6 times.
Despite the due diligence already carried out, Sinochem requires another two months in which to carry out further due diligence. Thus, while there is a proposed offer price — $13 a share — it is not firm and could be adjusted, or even withdrawn altogether, as a result of the additional due diligence.
At the same time, Nufarm has more freedom to act in relation to potential rival offers than would normally be the case at this stage.
While the heads of agreement contains “no shop” and “no talk” provisions, the usual fiduciary duty carve-out applies, so Nufarm can consider approaches if it considers them to be in the company’s best interests.
Moreover, while Nufarm must notify Sinochem of any third party approach and, if it’s likely to recommend such an approach, it must also notify Sinochem of the “general nature” of the competing proposal, it is not required to provide the crucial detail — the offer price and the terms and conditions.
Importantly, Nufarm at this stage does not have to provide Sinochem the opportunity to match, or better, any competing proposal. However, that right will be granted if Sinochem signs a binding transaction implementation agreement.
Sinochem will have a five-weeks period, from October 15 to November 18, to conduct due diligence. It will have a longer exclusivity period, from yesterday until December 3, but the additional time is to enable Sinochem to satisfy its various Chinese regulatory requirements.
In an attempt to try to induce Sinochem to commit, Nufarm has managed to include some carrot and stick in the heads of agreement.
The stick includes the termination rights. Nufarm can terminate immediately if Sinochem informs the company that it is no longer prepared to proceed at an offer price of $13 a share (that is, it tries to negotiate a lower price), it fails to pursue due diligence investigations with “reasonable diligence” or the implementation agreement is not executed by the end of the exclusivity period.
Nufarm can also terminate if it recommends a competing proposal. The carrot is that if Sinochem commits to the proposed $13 a share offer price and signs a binding agreement, then its exclusivity is strengthened by giving it the right to match, or better, any competing offer. It will also result in the inclusion of break fee provisions, under which Nufarm would pay up to 1 per cent of the scheme consideration if a competing proposal is recommended or successful before December 31, 2010 (15 months away), a Nufarm director withdraws or changes a recommendation to approve (other than if the independent expert concludes the scheme is not in the best interests of shareholders).
If a binding implementation is signed it will contain a number of binding conditions precedents, including all regulatory approvals — FIRB, ACCC, NZ Overseas Investment Office, US and European anti-trust (if required) and the various Chinese regulatory approvals. It will also be conditional on shareholder and court approval of the scheme, no material adverse change in the affairs and prospects of Nufarm, and the prescribed occurrences.
However, it has been agreed that there will be no financing condition (unusual for a Chinese, even a state-owned entity), no due diligence condition (because of the exhaustive amount of due diligence that will already have been undertaken) and no market fall condition.
If there are any other parties with an interest in Nufarm, they now know the price and terms proposed by Sinochem, and they know that the absence of a binding agreement enables Nufarm freedom to conclude a deal.
Nufarm will be hoping that possibility will spur Sinochem into quickly committing to a binding agreement.
Blowing smoke?
THE “independent” directors of Macquarie Airports (MAp) have not bothered to send to the ASX a copy of letter from Macquarie Capital last week, in which it threatened to reconsider its proposal to sell the management rights to MAp for $345 million should Mike Fitzpatrick’s GAp succeed in its court action to adjourn next week’s scheduled securityholder meeting to vote on the proposal.
If delaying the meeting would give Macquarie the right to walk away then it’s clearly material and MAp has failed to fulfil its statutory obligation to maintain an informed market.
If that’s not the case then Macquarie was merely blowing smoke. Macquarie, it should be noted, didn’t claim such a right.
It merely said “should the meeting be delayed it would need to reconsider its commitment to the proposal”. And Macquarie had an obligation to consider whether it should proceed “should a delay present an opportunity for Macquarie to re-assess its position”.
Securityholders and investors have no way of knowing whether or not a delay would present an opportunity for reassessment because that’s yet another piece of information that has not been disclosed. Macquarie is known to have entered into an implementation agreement, a transitional services agreement and a facilitation deed poll, none of which have been released; and there may well be others.
Meanwhile MAP’s security price continues to rise, up a further 4c yesterday to $2.87 as hedge funds continue to pile in, presumably punting that next week’s meeting will go ahead, and the Macquarie proposal will be approved, clearing the way for a one-for-11 renounceable issue to proceed. The proposed issue price is at $2.30 a security, which is 57c, or 20 per cent, below yesterday’s closing price, offering the buyers a handy profit. But the entitlement offer will only proceed if the Macquarie proposal is approved, giving the buyers an incentive to vote in favour of it.
Those who are buying to take a quick turn won’t be concerned about the pros and cons, only the profit they stand to make.