By Lynda Kiernan
As Australia continues to be affected by severe drought conditions, Nufarm announced it has agreed to sell its South American crop protection and seed treatment assets in Brazil, Argentina, Colombia, and Chile (Nufarm South America) to Japan’s Sumitomo Corp. for A$1.188 billion (US$800 million).
Ongoing drought at home and supply chain challenges from China have placed Nufarm in a defensive financial position, and after a year of disappointing earnings, AFR reports that there has been industry speculation that Nufarm has been courting buyers for select assets in order to improve its balance sheet.
“It’s certainly been a perfect storm,” Greg Hunt, CEO and managing director of Nufarm, told the Sydney Morning Herald. “Frankly… the level of gearing that was in this business, it’s just not appropriate for a business that can get the volatilities that you typically get in agriculture.”
“While earnings are up, external headwinds constrained performance,” Hunt stated in a company release. “The work we have done in 2019 sets a strong base to continue to improve earnings and cash generation in 2020.”
“We’ve largely addressed the significant inventory overhang from drought conditions in Australia and made good progress in re-setting the cost base to make this a more resilient business while maintaining upside exposure to improved weather conditions.”
For Sumitomo, which is an existing major shareholder holding 16 percent in Nufarm, the acquisition of Nufarm South America will bolster its efforts to carve out its own distribution network across the Latin American geography.
“Nufarm has built a strong distribution network in South America and this Transaction will realize value for shareholders in both companies,” said Sumitomo Chemical Executive Vice President Ray Nishimoto. “We look forward to continuing our long-term relationship with Nufarm as a strategic partner and major shareholder.”
Under the terms of the deal, Nufarm and Sumitomo will enter into a two-year supply and transitional services agreement by which Nufarm will provide procurement services and will continue supplying certain products to the affected businesses. In addition, the existing Master Agreement between the two companies touching upon product development and commercialization will be extended to 2025, with a clause allowing for a possible further term extension, and Nufarm remains confirmed as the preferred commercialization partner for Sumitomo’s proprietary fungicides Pavecto and Indiflin in Germany, Poland, and the UK.
“This Transaction represents compelling value for Nufarm shareholders and will provide an opportunity to refocus on other parts of the business where we can generate higher margins and stronger cash flow,” said Hunt.
“Our commercial relationship with Sumitomo provides access to an attractive portfolio of proprietary products and will continue to be an important contributor to our growth. Today’s agreement extends the term of our existing relationship and provides new opportunities to build on our expanding product portfolio in Europe.”
Expectations are that the deal will be completed in H1 FY 2020, given approval from Nufarm shareholders is secured, and South American regulatory bodies agree. Once closed, Nufarm will still operate a diversified global crop protection business focused on the major agricultural markets of Europe, North America, and Asia Pacific, and plans to undertake a review of corporate costs to identify channels to generate future savings.
It also will still control a rapidly growing, high-margin seed technology business that combines the seed treatment portfolio and the Nuseed business, which has customers in more than 30 countries, and growing market positions in canola, sunflower, and sorghum. Its acquisition of the nematicide Trunemc0(TM) this year is expected to be a driver of sales and earnings growth in North America in coming years, and first sales of Nuseed’s proprietary omega-3 canola product Aquaterra are on pace for FY 2020.
Looking to the future, Hunt said, “The significant reinvestment we have made in our European, Nuseed and North American businesses in recent years, along with the next phase of transformation in our Australian business, is expected to deliver earnings growth and improved returns for shareholders in the coming years.”