Last week, United Phosphorus Ltd acquired US-based RiceCo Llc along with its subsidiaries and some assets of the international business of its affiliate company.
RiceCo is a debt-free company primarily catering to the rice market in the US and has a strong herbicides product portfolio.
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As for the deal value, analysts from Angel Broking say, “The estimated acquisition cost of Rs 225 crore is in line with United Phosphorus’ historic average of two times EV/sales (enterprise value-to-sales). Given United Phosphorus’ strong cash position (around Rs 2,000 crore at the end of the fiscal second quarter), the acquisition would be funded through the same.”
According to the note, RiceCo is a profit-making entity at the net level and clocked a revenue of $25-30 million in calendar 2009. RiceCo derives around three-fourth of its revenue from the US and the balance from Europe, Latin America and other regions.
The acquisition appears small in terms of how much it will add to United Phosphorus’ profit, at least for this year.
RiceCo, though, would benefit by leveraging United Phosphorus’ global sales and marketing network to take its offerings to rice markets globally. RiceCo would also be able to provide farmers direct access to United Phosphorus’ offerings.
The RiceCo deal is the second acquisition for United Phosphorus in 2010, following its purchase of the global Mancozeb business and the Manzate brand from DuPont in June.
Analysts say the two acquisitions are likely to cushion an expected decline in United Phosphorus’ sales for the December quarter. Extended rainfall between October and December is expected to hurt the company’s performance for the quarter.
In a note to clients last week, analysts from Sharekhan wrote that a muted third-quarter performance, coupled with a revenue contraction of 1.3% year-on-year in the first half of fiscal 2011 could prevent the company from achieving its target of a 10-15% revenue growth for the fiscal.
“Consequently, we have revised our FY2011 (fiscal 2011) revenue estimate downward by 3.8% to Rs 5,810.7 crore, but left our FY2012 revenue estimate unchanged,” the analysts wrote.
Little wonder that since the beginning of this quarter, United Phosphorus’ stock has declined by 13%, ending Tuesday trading on the Bombay Stock Exchange at Rs 159.15, against the 3.5% decline seen in the BSE-100 index. But valuations do appear attractive following this decline.
Graphics by Yogesh Kumar/Mint
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