Sinochem and ChemChina in merger talks

Sinochem and ChemChina, China’s two top chemicals companies, are discussing a merger, people informed on the talks said, in a move that would further complicate attempts by ChemChina to close its $44bn takeover of Swiss agribusiness Syngenta.

The combination of the two Chinese rivals is part of a broader strategy by the regulatory body that oversees the country’s state assets to merge state-owned companies to create larger and stronger national champions, the two people said.

A merger would create an international chemical group with revenues of about $100bn.

The talks come as doubts have been raised in the Chinese media over the ability of ChemChina to close its acquisition of Syngenta, which would be China’s largest ever purchase of an overseas business.

Shares in SinoChem’s Shanghai-listed entity hit an upward trading limit of about 10 per cent after reports of the merger on Friday. Shares in Syngenta fell 2 per cent in morning trading, but recovered to trade near 1 per cent lower. Spokespeople for both companies have denied merger talks.

A merger would be regarded in China as a defeat for ChemChina’s chairman Ren Jianxin, whose reputation as an empire-builder has been cemented by his efforts to buy Syngenta.

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The merger discussions have been driven by SinoChem’s chairman, Ning Gaoning, one person said, who joined the chemicals firm at the start of the year.

Mr Ning, who goes by the English name Frank, helped build the international business of state-backed food group food firm Cofco through several high-profile outbound acquisitions before he joined Sinochem. His appointment was seen as a sign that the state group had been empowered by China’s top leadership.

“Ning Gaoning is going to push for this very hard,” said an official familiar with the plans of Sasac, the state-owned asset supervision and administration commission. “Ren will have no choice but to accept.”

Sinochem could help ChemChina provide its share of financing for the Syngenta deal but the combination could also significantly complicate regulatory approvals overseas.

ChemChina’s acquisition of Syngenta has been approved by the committee on foreign investment in the US (CFIUS), but adding a large new equity partner before the Syngenta deal closed could require a new review.

Meanwhile, both Sinochem and ChemChina have significant assets overseas, meaning that their merger could be the first between Chinese state-owned firms to trigger anti-monopoly reviews by foreign regulators. Both companies reported a loss last year.

Sinochem and ChemChina have long vied for superiority in China’s chemicals industry. Sinochem is China’s top fertiliser producer and, during Mr Ning’s nine month tenure, has been positioning itself for a leading role in the rapidly-consolidating international agricultural chemicals industry.

ChemChina, by contrast, is seen by analysts as a sprawling but not particularly integrated entity that has been constructed through Mr Ren’s drive for dealmaking.

ChemChina’s acquisition of Syngenta, which was announced in February but is still pending approvals from several overseas regulators, would push the company into the agribusiness space once dominated by Sinochem.

Questions emerged earlier this week on whether ChemChina could complete the deal. Caixin, a respected financial magazine based in Beijing, reported that a crucial piece of financing for the deal — ChemChina’s own $15bn equity contribution to the buyout — was missing. Two days later, Caixin ran a similar story claiming that investors backing ChemChina were concerned by the lack of state support for the transformational acquisition.

Several banks close to the financing of the project said earlier this week that all of the necessary bridge financing for the deal had been in place for months and that they had no concerns on the viability of ChemChina’s buyout. Syngenta has made similar remarks.

However, these syndicated loans would have to be replaced by longer-term company debt and equity. One investor familiar with the terms said that there were concerns over the high level of debt that ChemChina has taken on to finance its overseas deals. For the takeover of Syngenta, ChemChina had committed only a small part of its own equity, the person said.

ChemChina’s Mr Ren is seen as unusual among the heads of China’s state-owned companies. He founded the company in 1984 and, after acquiring a series of state-owned groups, continues to control ChemChina 32 years later. Most state-owned enterprise chairmen, such as SinoChem’s Mr Ning, are rotated between positions and often end up in government and regulatory roles.

Additional reporting by Arash Massoudi

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