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Indian agribusiness deal shows Sumitomo Chemical gleaning for growth
Jul. 1, 2016
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JapanSumitomo Chemical's bid for an Indian company may seem small compared with the tens of billions of dollars being offered in the industry's upper reaches, but it fits the Japanese company's slow-and-steady strategy just right.
Back in December, when markets were abuzz with news of a planned merger between Dow Chemical and DuPont, Sumitomo Chemical had its gaze squarely fixed on India. It had gotten wind that the country's third-largest homegrown agrochemical supplier, Excel Crop Care, was searching for a buyer.
Excel has earned a reputation for quality as a maker of off-patent weed killers and pesticides. But its founding family had been wrestling with the challenge of managing a leadership succession.
The timing could not have been better for Tokyo-based Sumitomo Chemical, which has had trouble penetrating the Indian market. Excel's sales network reaches farmers nationwide. The acquisition will combine this on-the-ground presence with Sumitomo Chemical's strength in products for fruit trees and vegetables, for which it foresees high demand in India.
The deal "has merits beyond simple addition," said Ray Nishimoto, who heads the Japanese company's health and crop sciences business.
Under an agreement announced early June, Sumitomo Chemical will acquire a 44.98% stake in Excel from the company's founding family and other shareholders. It aims to own as much as 75% after a subsequent tender offer.
The two companies take in a combined 18 billion yen ($167 million) in annual agrochemical sales in India. Sumitomo Chemical aims to raise this amount to more than 30 billion yen in the near future. It has seized an opportunity to make a big advance in a market growing by 4% a year.
Its investment in Excel, which will not exceed 17 billion yen, pales in comparison to Bayer's $62 billion (nearly 7 trillion yen) bid for Monsanto, which the latter rejected as too low. But Sumitomo Chemical, ranked 10th worldwide in agrochemical and seed sales, is doing what it can to cling to its midtier status.
The gleaner
Industry leader Syngenta and the rest of the top six players have been engaged in a flurry of deals aimed at even greater scale. Sumitomo Chemical, with only a fraction of the annual sales of the Swiss major, can hardly hold its own in a high-stakes bidding war. But like a sharp-eyed bird scanning a field for fallen grain, it can swoop on successful enterprises that bigger rivals overlook -- like Excel.
"While the giants are busy realigning, now is our chance," said Nishimoto.
Sumitomo Chemical will also be on the lookout for businesses that the majors offload in order to get big deals past antitrust watchdogs, he said.
Symbiotic relationships
Agrochemicals and feed contributed nearly half of Sumitomo Chemical's all-time-high operating profit in fiscal 2015. The company has endured by building up its strength in areas underserved by the majors, which focus on high-volume products for wheat and other staples.
Indeed, Monsanto sells Sumitomo Chemical herbicides along with its own because its weed killers are not as effective without them. The Japanese company has partnerships with all of the industry's top six companies. It wants to ally with them on sales of proprietary formulas that use the power of microbes to fight pests.
"The big six are collaborative partners, not enemies," President Masakazu Tokura says.
But the flip side of this cooperation means the Japanese company must continue inventing the chemicals that industry giants want. Hence the importance of acquisitions like Excel, unless Sumitomo Chemical keeps growing, it cannot continue to spend 7-10% of its revenue on research and development, as is said to be needed.
If it succeeds, it will show that not only the big survive.
Source: NIKKEI ASIAN REVIEW
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