United Phosphorus' M&A trail makes agro-chemicals sexy

They are the ugly ducklings of the chemical world. While pharmaceutical companies get headlined in the pink press even for small deals, agro-chemical companies have to live in anonymity even when they make waves.

In the last four months, United Phosphorus Ltd (UPL) has silently acquired two Brazilian agro-chemical companies. On Tuesday, UPL acquired a 51 percent stake in DVA Agro Do Brazil for $150 million. This is UPL’s third acquisition in Brazil over the last two years.

[caption id=“attachment_49387” align=“alignleft” width=“380” caption=“UPL operates in the entire spectrum of crop protection with products in fumigants, fungicides, insecticides, rodenticides and herbicides. Vivek Prakash/Reuters”]  [/caption]

DVA is involved in the production, marketing and distribution of crop protection products in Brazil. The company deals with generic crop protection products (i.e. pesticides and herbicides) that are used for corn, sugar and cotton. DVA posted a turnover of $130 million in calendar 2010; the company has grown at the breakneck speed of a compounded annual rate of 60 percent since 2007.

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UPL has been on an acquisition spree over the past few years. In financial 2010-11, it acquired three companies. In the current fiscal, it acquired two. The largest crop protection company in India, it operates in the entire spectrum of crop protection with products in fumigants, fungicides, insecticides, rodenticides and herbicides. The company last year made its largest acquisition by buying out Cerexagri, which has a significant presence in the US and Europe.

UPL has, in the recent past, increased its reliance on Latin American markets, and for good reasons. These markets are one of the fastest growing agro-chemical markets in the world, boasting a growth rate of 14 percent against a world average of 2.5 percent. The region also offers higher margins. The current acquisition comes after it bought Sipcam Isagro Brazil in April 2011 and Mancozeb brand from DuPont in June 2010. The recent acquisition will result in UPL’s doubling its operations in Brazil.

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While details of DVA’s financials have not been made public, what is clear is that UPL has been acquiring European-owned agro-chemicals companies that have been facing debt issues, as they have grown faster than their resources allowed. Companies in the Latim American area have been financially affected due to high working capital requirements, which include payment cycles of 200 days after sales. In comparison, UPL has a working capital cycle of 60 days.

UPL is sitting on Rs 1,800 crore, which includes mutual fund investments of Rs 240 crore. It has a net debt-to-equity ratio of 0.5, which means it can raise more loans. With its financial muscle, the company is in a position to cherry-pick companies that are in financial trouble.

A truly multinational Indian company, what UPL lacks in comparison to world leaders like Monsanto and Syngenta is new product discovery and a strong research-based seeds division. Perhaps an acquisition in these areas can help bridge the gap.