Adama Shares to Trade in China in Reverse Merger

A year after failed IPO, Israeli agrochemicals maker to tie up with Shenzhen-traded Sanonda.

Yoram Gabison
Yoram Gabison
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A statue of a bull stands outside the Shenzhen Stock Exchange building in the Luohu district of Shenzhen, China, Dec. 17, 2013.
A statue of a bull stands outside the Shenzhen Stock Exchange building in the Luohu district of Shenzhen, China, Dec. 17, 2013.Credit: Bloomberg
Yoram Gabison
Yoram Gabison

Less than a year after it was forced to withdraw plans to go public in New York, Israel’s Adama is on its way to be traded on the Chinese stock market and become a major player in China’s agrochemicals market.

Adama, the world’s biggest maker of generic pesticides, will become publicly traded via a reverse merger with Chinese company Hubei Sanonda, which is listed on the Shenzhen Stock Exchange at a market capitalization of about $810 million.

Under the plan, Hubei Sanonda will buy control of Adama by issuing shares to Adama’s two shareholders — China National Chemical Corporation, which is popularly known as ChemChina and has a 60% stake in Adama, and Israel’s Discount Investment Corporation, which holds the rest.

With Adama likely to be valued at about $2.9 billion, ChemChina and Discount, which is part of the IDB group, could end up with a controlling 86% stake in the merged company.

The deal, if completed, would be among the biggest between the two countries ever and mark a milestone in growing bilateral ties. Control of Adama, previously called Makhteshim Agan, was acquired by ChemChina in 2010 in the biggest bilateral deal before China’s Bright Food bought Tnuva Food Industries this year.

Adama was supposed to conduct an initial public offering last November, but a weak global agrochemicals market caused underwriters to demand a sharp cut in the proposed offering prices of $16-18 per share. Adama’s controlling shareholders decided to pull the offering.

That left Adama adrift. The proceeds from the IPO, which were expected to reach as much as $425 million, were supposed to finance Adama’s to boost its holding in Sanonda to 31.6% and to buy 100% of three other small Chinese agrochemicals companies for a combined $625 million.

The acquisitions would have given Adama a foothold in the key Chinese market.

Even though it is in effect Plan B for Adama and its controlling shareholders, the reverse merger offers the company several advantages over the abortive New York IPO.

The original plan would have left Adama as a minority shareholder in Sanonda, with the public owning 69.4%, limiting Adama’s rights to manage the company as it sees fit under securities regulations. Under the reverse merger, the two companies will be fully integrated.

The other advantage is that the merged company’s stock market valuation will likely be considerably higher than if it were traded on the New York Stock Exchange as originally planned. Even though the reverse merger comes in the midst of a massive downturn in the Chinese stock market, Chinese shares are still trading at high valuations, compared to their global peers.

While agrochemicals companies typically trade at about 10 times their enterprise value to earnings before interest, taxes, depreciation and amortization, or Ebitda, Sanonda trades at 14 times.

The merged company will have operating cash flow of $552 million even before taking into account synergies from the merger. At 14 times EV/Ebitda, that could give the combined company a market cap of $6 billion. That, in turn, would give the company the equity capital to finance the mergers and acquisitions deals as it has sought to do, taking advantage of the same industry-wide woes that confounded its IPO a year ago.

Merging with Sanonda will also enable Adama to cut costs and overnight turn it into China’s third-largest agrochemicals company, after Syngenta and Shenzhen Noposion. It will gain access to Sanonda’s sales network, while the Chinese company will be able to sell in Australia, Brazil, India and the United States, using Adama’s marketing approvals.

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