FREE

Event update: UPL (Outperformer) - Big gets bigger!

Event

UPL through its 100% international subsidiary UPL Corp, has entered into an agreement to acquire the Arysta Lifesciences agrochemical business from Platform Speciality Products

Key highlights

• UPL will pay $4.2bn cash towards this acquisition; business will be acquired on a cash free debt free basis
• Arysta had revenues of $1.95bn and EBITDA of $424m / 22% EBITDA margins (FY18). Hence, the deal is valued at 9.9x EV/EBITDA (excluding synergies).
• There are significant cost / revenue synergies to be realised from this transaction; Rs10-12 EPS upside guidance in FY20E underlines the financial upside potential of this transaction
• Management indicated that the businesses are significantly complementary to each other along various dimensions – geography, product portfolio, customer mix. This significantly enhances combined entity’s competitive advantage in the market place.
• The acquisition is expected to close by end of Q3FY19E or early Q4FY19E.

0ur view

We are positive on this transaction as we see significant strategic value for UPL along with potential meaningful upsides; it’s a transformational deal for the company. Strategically, this deal will help to transform UPL into a specialty player from a being a pure generic player – a difficult transition to achieve organically. While the company becomes significantly leveraged post the transaction (a key risk to monitor over the next few years), we believe that the significant performa cash flows of the combined entity in a reasonably stable business give comfort.  Further, the $1.2bn equity raise helps to mitigate the risk without diluting UPL Ltd shareholders at the listed company level. We maintain Outperform and Recommend buying into the ongoing weakness with 2-3 year view to leverage potential upsides from the Arysta transaction. Any deterioration of cash flows from the Arysta business remains a key risk. (We will review our estimates post Q1FY19E quarterly results)