Syngenta AG (SYNN VX) Bloomberg reports that China National Chemical Corp (Chemchina) is in talks to buy Swiss pesticide maker Syngenta AG (the market leader in agrochemicals and sizable (global number three) seeds business) in what would be the largest acquisition by a Chinese company of a European target, people with knowledge of the matter said. ChemChina is understood to have offered about 449 francs a share, which values Syngenta at about 41.7 billion francs ($42 billion), said one of the people, who asked not to be identified because the information is private. Syngenta, which has a market value of about $32 billion, rejected that offer citing regulatory risk, the person said. While a deal isn’t imminent, the two sides are still talking and an agreement could be reached in the next few weeks, said the people. Syngenta is also talking to other potential suitors as it explores options, the people said. Talks may fall apart and Syngenta may decide to stay independent or seek acquisitions of its own, the people said.

A bid by Chemchina looks very credible as Syngenta is one of last stand-alone agrochemical companies that offers large scale access to seeds and genetically modified (GM) products like corn and oilseeds (China is the second largest country by corn acreage, and China seems to warm up to the idea of GM products).

This news comes less than 3 months after Monsanto decided to walk away from its rejected (bumped) CHF 245 cash and 2.229 Monsanto shares offer (worth CHF 453 now) – although large-scaled acquisitions by Chinese (government controlled) companies are notoriously taking long time, a bid by Chemchina looks to have much fewer hurdles than a bid by Monsanto:

i) No shareholder/opposition vote risk/offer value dilution: It is understood that a bid by Chemchina is 100% cash – contrary to what was a cash/shares offer by Monsanto, where shareholder opposition was building against an expensive acquisition for Syngenta (and a resulting 10%+ Monsanto’s share price decline over the course of its campaign), any signed-off bid by China would not run into potential shareholder opposition/headline offer price declines.

ii) Although national US interest risk, much less antitrust/ regulatory risk:  Given that the agrochemical industry has consolidated massively over the past decades  (leaving only three players: Syngenta, Bayer, and BASF), only a large scale bid by a Chinese company would be able to get through the regulatory process as firstly a combination between any of the 3 leading companies is impossible, and secondly there is neither too much manoeuvring room among those who previously were active in agrochemical businesses, such as DuPont, Monsanto or Dow Chemical. Although ChemChina bought Makhteshim Agan in 2011, the leading generic crop protection company in 2011, antitrust risk should be limited, and should be more a timing risk rather than a deal block risk. Main risk however would relate for Chinese in obtaining national interest/CFIUS approval as about 20% of Syngenta’s revenues are in US.

iii) No tax inversion risk: Given that any bid is understood to be 100% cash, and not the most remote notion of a tax inversion angle for a Chinese bid, there is less such headline risk (over what would be a long-dated 12-18 month deal) than Monsanto’s campaign which was a disguised tax inversion redomicilation exercise.

iv) Leadership vacuum/No current CEO: The end of October, Syngenta announced that its CEO Mike Mack was stepping down as CEO.

We find it very interesting that Chinese are offering CHF 449 – which is exactly same level where Monsanto started its campaign in May this year: we believe that Chinese might be initiating a bidding game themselves, and most likely have enough firepower left to increase to CHF 500+ a share, a level which was understood over the summer where Syngenta would be willing to recommend (at a time with no clear leadership).

Although agrochemicals deals are notoriously difficult to trade (most likely industry with highest level of (pre-)deal breaks), we would not immediately chase Syngenta here up 10%, but would take this Chinese offer for Syngenta very seriously. Also still possible that Monsanto could come back out of the woodworks. Medium-term upside: CHF 400-470 (10-15% pa spread on CHF 470-500 cash offer). – short-term downside: CHF 325-350. Would initiate position below CHF 360.