United Phosphorus’ appetite for acquisitions shows no signs of abating. The company has acquired a 51% stake in DVA Agro do Brazil (DVA Agro Brazil), an agrochemicals company. DVA Agro Brazil is the Brazilian operation of DVA Agro, which in turn houses the agrochemicals business of DVA International, a Germany-based diversified company with operations in steel, plastics, and health & nutrition. The group claims its speciality is marketing and product development.
United Phosphorus will pay $150 million or about Rs 670 crore in cash for a 51% stake, with some of the money being invested in DVA Agro Brazil, and the rest going to buy shares from existing shareholders. The split has not been revealed.
DVA Agro Brazil sells generic crop protection and nutrition products and had a turnover of $130 million, which translates to a price to sales valuation of 2.2 times. If the acquired company also has loans on its books, then the enterprise value (market capitalisation plus debt less cash) could be higher. The acquisition will add 10% to United Phosphorus’ revenues, based on 2010-11 financials.
Brazil has become a market of focus for United Phosphorus, as it attempts to increase revenues from one of the leading agricultural economies of the world. The market for agrochemicals is estimated at about $7 billion or Rs 31,100 crore at today’s exchange rates.
Earlier, in March 2011, it had announced the acquisition of a 50% stake in Sipcam Isagro Brazil, another agrochemical company. That company’s revenues in 2009 were about Rs 500 crore in 2009, and United Phosphorus acquired a 50% stake from its promoters. In an article done when the acquisition was announced, Indiabusinessview estimated the acquisition to have been done at a price of about Rs 100 crore.
In comparison, the DVA Agro Brazil deal seems quite expensive, which may be explained by better financials. The company being acquired makes and sells crop protection and speciality products and is expanding formulations capacity in Brazil.
In both the Sipcam and DVA deals, United Phosphorus has strong local partners, who understand the market. United Phosphorus can bring its own technical skills, manufacturing and product portfolio and combine it with the marketing and product skills of the Brazilian operations. But it remains to be seen if having two ventures in the same business would make sense.
If they can combine operations of both Brazilian entities in some form, seeking synergies in areas such as production, marketing and finance, growth and profitability both could improve significantly. But that would mean convincing two different joint venture partners to work on the same platform.
United Phosphorus is paying a sizeable sum to acquire the company, and it has a debt to equity ratio of 0.7:1, with total debt at Rs 2,492 crore. It has cash on hand of about Rs 1,560 crore, enough to cover the acquisition.
Since the agrochemical business is working capital intensive, it would like to remain liquid, and may decide to raise some more debt to fund this acquisition. Unlike the Sipcam acquisition, where it is an equal partner, United Phosphorus owns 51% in DVA Agro Brazil and will hence consolidate its financials with its own. In the other JV, it may only consider proportionate profits, and the treatment will become evident after the June quarter results are announced.
At the time of posting, United Phosphorus’ share was up by 2% since Monday, a day before the announcement was made. Investors do not seem very excited, and may seek clarity on DVA Agro Brazil’s its profitability and growth before they can conclude if it is a good deal.