>United Phosphorus acquires the global non-mixture Mancozeb business from DuPont

UPL has acquired the global non-mixture Mancozeb fungicide business and related assets from DuPont including existing inventory and formulation facility in Colombia as well as rights to registered brands, trademarks, registrations and all supporting regulatory data for these products including the popular Manzate brand fungicides. Post its Cerexagri acquisition, UPL had already become one of the top 3 players in Mancozeb market globally. With this new acquisition, UPL will further strengthen its position in the now 2 player dominated global Mancozeb market (UPL and Dow) post DuPont’s exit.

■ Key details of the transaction include
• The acquired business has sales of ~$70mn and UPL has paid 1.4x-1.6x sales in cash as consideration including working capital
• Given DuPont’s brand equity in the space, the product has significantly high gross margins which will translate into very attractive EBITDA level contribution after considering UPL’s frugal SG&A cost structure. Management is targeting 4-year payback period on this acquisition which could be accelerated if the business conditions are favorable.
• Most of the sales of this business are to Latin American geographies with North America accounting for the balance. The acquisition of this global brand significantly strengthens UPL’s overall strategic positioning in the extremely critical Latin American (as well as Central American) markets. This will significantly enhance UPL’s clout with the distributors in the region and have a positive rub-off impact on the balance portfolio too. This acquisition will also aid UPL’s entry into the Brazilian market
• The Colombian manufacturing facility is extremely efficiently run and will be an asset to UPL as it will enable UPL to significantly cut down its logistics cost involved in supplying to the Latin
American geographies from its Indian facilities

■ Our View
This is the first acquisition undertaken by UPL post its Nov 2006 acquisition of Cerexagri as it eschewed inorganic growth and opted to entirely focus on organic growth given the spike in global agrochemical asset prices. With the asset prices becoming reasonable in the wake of severe challenges faced by global agrochemical industry in 2009 and UPL’s balance sheet in a very healthy shape (0.3x net gearing and Rs32bn net worth as of FY10 end), the stage is set for UPL to dramatically step up the inorganic growth momentum. We believe Mancozeb acquisition makes immense strategic sense and the economics also look compelling given management’s 4 year payback target. Adjusting for $20mn per annum of brand acquisition revenues already built in our estimates, we are upgrading our FY11 and FY12 EPS estimates by 1% and 3.4% respectively to incorporate this transaction. We expect UPL to close some more transactions during the year which will lead to further earning upgrades. Reiterate Outperform with a
target price of Rs277.

To read the full report: UPL