Syngenta (NYSE:SYT) is poised to deliver significant returns to arbitrageurs in the coming months. However, hedge funds don't like to touch the name these days. The hedge funds that posted gains in '16 don't want to risk them as bonus time is getting closer, and they will argue that Syngenta has no immediate catalyst, while agreeing that it is a very interesting situation. The hedge funds that lost money in '16 are looking for something safer and more immediate. Also, now that the CFIUS review is not an issue anymore, some US hedge funds have lost interest as the dominant angles in the situation are Chinese and European, perceived as more opaque and farther away from home. For these and many other reasons, Syngenta has been completely oversold, and we think it is now trading at an implied probability of closing of approximately 35%. We believe instead that this deal has around 90% of probability to make it, when you stick to the facts. We also recommend to trade the US ADR instead of the Swiss stock because the offer from Chemchina was made in USD.
Let's take a look at the factors that caused the stock to lose over 10% of value in two months.
1. Caixin, a reputable Chinese website, has been reporting that Sinochem and Chemchina might merge, maybe, and one day. Chemchina has stated that it is not in talks. Anyway, it could make sense, they are both state-owned and they are both crippled with debt, though Chemchina more than Sinochem. For this potential merger to impact the current Syngenta deal, it would have to be announced and closed within months, very unrealistic within Chinese state time frames. Also, why do it before the Syngenta deal closes? Why create any additional layer of complexity? This deal is highly strategic and high profile for the Chinese government, which is very likely to have informally approved it a while ago (discussions between Chemchina and Syngenta had been going on for years). The government is facing a dramatic decrease in the hectares of arable land per person in China in the last 20 years, addressable with better yields through higher productivity of innovative seeds and herbicides. In five years, the controlling shareholder of Syngenta will still be the Chinese government, whether through Chemchina or Sinochem, and that is what matters to arbitrageurs.
2. A portion of the equity financing is still missing. Lots of analysts talk about this all the time. It should be mandatory to include a disclaimer which should read somewhat like this: Equity financing has nothing to do with the closing of the deal and the payment of the purchase price to shareholders because committed financing from HSBC and CITIC is in place to close the deal. Equity financing relates to the capital structure of Chemchina post-closing of the deal in 2017, when the company will want to replace the bridge financing of HSBC and CITIC with a more permanent and cheaper capital structure. Great, so arbitrageurs don't need to care about equity financing as well.
3. The EU merger review has moved to phase 2. This is the one and only fact that changed in the last two months. It's true it was not expected, because the overlap between Chemchina and Syngenta in Europe is minimal. However, the commission has made it clear that this is driven by the other two deals in the sector being in progress (Bayer (OTCPK:BAYRY)/Monsanto (NYSE:MON) and Dow (NYSE:DOW)/DuPont (NYSE:DD)), and Syngenta made it clear that after the Monsanto deal was agreed, the commission asked for many more information and that more time became needed for a review. The statement itself from the commission in relation to this decision has been seen as very benign. Some feared that the commission would mention potential future competition issues in products or markets that are not yet existent, or that the commission would want to analyze antitrust issues with all the Chinese SOEs. Also, Chemchina recently became the 100% owner of its only European agrichem business, Adama (less than one-fourth the size of Syngenta), which will make it easier to divest if needed.
There are countless other fears and theories behind the drop of the share price of Syngenta; just to remember a few:
- Ren, the CEO of Chemchina, is not seen favorably by the Chinese government anymore. Why? Has any reliable media outlet written anything material on this? No, and Ren is still there making deals as usual.
- Trump has been elected. What if he does not want US companies to be bought by Chinese companies anymore? Well, Syngenta is not a US company, it is actually a Swiss company. We suspect he might have more pressing and relevant issues to deal with than asking for retroactive actions impacting international commerce and relations in three continents.
- SAFE, the Chinese agency that regulates the expatriation of capital, should become more strict. However, there are countless non-strategic Chinese deals whose only purpose is to expatriate capital or delist in the US and relist in China to ride the stock market bubble at home, and these are the deals SAFE is targeting. Syngenta has none of the features described.
We suggest to hedge funds that want to overperform to be "greedy when others are fearful", and to stick to the facts. Syngenta is under the perfect media/rumors/conspiracy theories storm, however, there is yet no one fundamental single fact that should derail the deal, and the best of all catalysts is coming in four months: the closing.
Disclosure: I am/we are long SYT US.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.