Halcyon

Halcyon (S$0.735) M&A to create global natural rubber powerhouse
Sinochem Int’l is launching a takeover bid for Halcyon Agri and merging it with GMG Global and its natural rubber assets to create the world’s leading natural rubber supply chain manager.

The China-based chemical giant will be acquiring 30.07% interest in Halcyon at $0.75 per share, triggering a a mandatory general offer for the rest of the rubber processor. Together with undertakings by other shareholders, Sinochem will raise its stake in Halcyon to no less than 53.98%.

Upon completion of the first deal, Halcyon will make a voluntary offer for all of GMG by issuing 0.9333 new share for every one GMG share held, which controlling shareholder Sinochem (51.1% stake) has given its irrevocable undertaking.

Subsequently, Halcyon will also acquire Sinochem’s natural rubber processing assets in China and Malaysia, as well as trading businesses, for a total consideration of $210m to be funded via 280m new shares.

Following the transactions, which are expected to be completed by 3Q16, Halcyon will become the holding entity of the expanded group and remain listed on SGX.

The upstream business of the combined entity would have 153,000ha of land in Africa and SE Asia. In the midstream segment, it would operate 35 processing facilities with a total annual capacity of 1.5m tonnes, as well as boasts annual rubber and latex sales potential of more than 2m tonnes.

While the M&A will significantly expand its size and market share, Halcyon will be issuing 715m new shares (against existing share base of 600m) for GMG, whose market cap is only 5% greater than Halcyon. This implies that Halcyon shareholders will face some dilution risk.

Post M&A price of Halcyon = Halcyon market cap ($450m) + GMG market cap ($471m) + Sinochem assets ($210m) / 1.6b enlarged share base (600m Halycon + 766m GMG x 0.9333 + 280m new shares) = $0.71

On the other hand, each GMG share will end up with 0.9333 Halcyon share worth $0.66. However, the stronger parentage should bode well for Halcyon given its high leverage with net gearing of 3.1x.

Given the persistent volatility in commodity prices, investors may consider accepting the offer of $0.75 (18% premium to pre-M&A news) for Halcyon shares, and re-enter the rubber market when macro factors turn more favourable.