Makhteshim Withdraws From Albaugh Deal After Due Diligence 'Discoveries'

Confidentiality agreement shrouds reasons for cancellation, but analysts suspect heavy dependence on a single herbicide played an important role.

Israeli agrochemicals giant Makhteshim-Agan Industries won't be acquiring fellow pesticides producer Albaugh after all. The Israeli firm, which is the world leader in generic crop protection chemicals, said it abandoned the billion-dollar deal because of "discoveries" made during the due diligence process.

farmer - AP - Sept 3 2010

Makhteshim-Agan said discoveries that arose during due diligence materially deviated from the figures on which it had based its decision to pursue the acquisition.

Nochi Dankner, who controls Makhteshim-Agan through his business group IDB, made the decision Wednesday night after he and other top IDB people - including Makhteshim-Agan CEO Erez Vigodman and Ami Erel - met with Dennis Albaugh in Ankeny, Iowa, where Albaugh is based. Apparently, although the IDB people wanted the deal to work - hence the presence of its biggest guns at the meeting - the parties failed to bridge the gaps and the deal died.

Due diligence is a routine process conducted during acquisitions, in which accountants comb through the target's books to verify the data behind the deal. Generally speaking, the purpose of this process is to gain deeper knowledge of the target company.

Makhteshim-Agan did not elaborate on the nature of its "discoveries" or how they contradict the figures it possessed beforehand, as it had signed a confidentiality agreement with Albaugh.

The Israeli agrochemical company had released a letter of intent to acquire Albaugh on June 27, saying it would be assuming full ownership of the Iowa-based firm for about a billion dollars. The merger would have made Makhteshim-Agan the biggest generic pesticides provider in both North America and Latin America.

Heavily dependent on glyphosate

Some analysts raised eyebrows - likely due, in part, to Albaugh's heavy dependence on a single product, glyphosate, a nonselective herbicide. One issue at hand is that the price of glyphosate in world markets swings wildly; another is the issue of resistance. Glyphosate became widely used in the 1990s, after the agricultural company Monsanto engineered food crops to resist the chemical.

But just as over-abundance of antibiotics led to the evolution of "super bugs" resistant to them, the sheer prevalence of glyphosate may have spurred the development of "super weeds." Certain crop-choking weeds in North America have been steadily developing an immunity to the chemical, which is sold under the brand name Roundup.

In search of a growth driver

According to Amir Foster, an analyst at DS Apex, Albaugh would have solved two problems facing Makhteshim-Agan, and now the Israeli company has to find new solutions.

"The acquisition of Albaugh suited Makhteshim-Agan for two reasons. For one, it gave it a serious growth driver, something it lacks right now," Foster said. Albaugh would have helped Makhteshim-Agan penetrate new regions, while its entry into nonselective herbicides such as glyphosate would have boosted Makhteshim-Agan's growth to a new level.

The acquisition would have also improved Makhteshim-Agan's costs structure, which isn't competitive, Foster told TheMarker.

"Makhteshim-Agan manufactures mainly in Israel, where costs are high," he said. "It would have acquired Albaugh's plants and a huge production platform in low-cost countries such as Argentina. Now Makhteshim-Agan has to find another solution."

Foster was not concerned about Albaugh's dependence on glyphosate, which he feels is a blockbuster and will stay that way for a long time. As for the chemical's price fluctuations: "Its price had climbed much too high, to $14,000 per ton, and perhaps overshot on the downside, falling to a low point of $2,700. Now it's about $2,940," Foster said.

All in all it's an excellent herbicide that works very well on most weeds and is here to stay for at least a decade or two, thanks to the development of genetically resistant crops, Foster explained. Moreover, genetic engineering companies are breeding crop plants resistant to both glyphosate and to Dicamba, a product that Albaugh also manufactures.

"I feel nonselective herbicides will be very strong in the years to come - 16% of the crop protection market in 2008 was glyphosate," Foster added.

What are Makhteshim-Agan's options? It could buy a different big company, a number of small ones, or expand out of its core area - for instance into engineered seeds, he suggested. "Or perhaps Makhteshim-Agan itself could become a target for acquisition," Foster said.

Bank Hapoalim analyst Yaron Friedman concurs that the sudden retreat from the acquisition, which would have been the biggest in Makhteshim-Agan's history, means the Israeli company must now seek out new solutions to its challenges.

But on the bright side, Friedman adds, acquiring Albaugh would have forced Makhteshim-Agan to significantly increase its leverage and risk, which could have resulted in a downgrade, which in turn would have increased the yield on its bonds. Withdrawing from the acquisition means Makhteshim-Agan's financial risk diminishes. Friedman adds that glyphosate is low-margin.

Erez Vigodman, president and CEO of Makhteshim-Agan, said the company has made the right decision based on the inconsistencies discovered during its due diligence. The management will do everything in its power to assure Makhteshim-Agan's growth and expansion, he said.