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Market indifferent to United Phosphorus’ Brazilian acquisition

Market indifferent to United Phosphorus’ Brazilian acquisition

United Phosphorus Ltd (UPL) announced on Monday that it has entered into an agreement to acquire a 50% stake in Sipcam Isagro Brazil (SIB), a 50:50 venture between Sipcam-Oxon group and Isagro. Following this, Isagro will exit the venture.

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UPL has not disclosed how much the deal was worth. However, in a press statement released on 27 January, Isagro had said the sale of a 50% stake in SIB and Isagro Italia would collectively fetch it revenue of €35 million (Rs220 crore), without disclosing the actual split for each sale.

SIB’s sales for calendar year 2009 (CY09) stood at €81 million, while the revenue of Isagro Italia in the same period was €79 million.

Based on this, it’s unlikely that UPL would have paid more than €20 million for the acquisition, according to an analyst who did not want to be named.

In CY09, SIB’s operating profit performance was weak due to a fall in sale prices in the Brazilian market, along with high-value inventory at the beginning of the year. In fact, the company even reported a loss.

But SIB’s performance in CY09 would not be an actual indication of the joint venture’s (JV) performance. In CY08, SIB’s operating margin stood at 17%, much higher than the low single-digit margin in 2009. According to the analyst cited earlier, UPL claims the venture currently has double-digit operating margin.

UPL has limited presence in the Brazilian market, the size of which is estimated to be about $7 billion. This deal would improve the company’s presence in an important market in the agrochemicals space. In terms of synergies, the company could look at distributing its products through the venture’s distributors’ network.

Having said that, the incremental revenue from this deal is not very significant. “We view this acquisition as marginally positive. However, the following risks remain—it is margin dilutive—17% in CY2008 versus United Phosphorus’ 19% in 9MFY11 (nine months ended December); the receivable cycle in Brazil is longer (>200 days); the JV has significant debt (three times debt/earnings before interest, tax, depreciation and amortization), mainly for working capital; and while Sipcam is an established Italian agchem firm ($465 million in sales), the Brazilian JV was formed in CY2006 only," wrote Priti Arora of Kotak Securities Ltd in a note to clients on Monday.

UPL’s shares have fallen by 4% since the deal was announced, even while the broader markets have been flat. The shares have underperformed the markets since the company announced weak financial results for the December quarter. It also reduced its revenue growth guidance to 5% for 2010-11 compared with the earlier guidance of 10-15%.

Graphics by Sandeep Bhatnagar/Mint

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