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Opinion: Nufarm deal doubts look overdone

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Steady on, mate. Investors are wise to keep a wide margin for error when considering whether Sinochem's approach to Australia's Nufarm will end in a deal.

But the 13% discount they are allowing to Chinese group's Aus$2.8bn (US$2.4bn) bid may be overcautious.

Surprise surprise

Sure, pessimists have an arsenal of arguments on their side. Nufarm's last approach - also from China - fell through two years ago for reasons that have never been explained.

There's no guarantee that Sinochem's bid won't follow suit. The Chinese chemical giant isn't tied into a deal. Its legal obligations thus far stretch to undertaking due diligence of the Australian chemicals group in good faith.

Nufarm's numbers have surprised even its own managers this year. The company followed up a rights issue in May, when it said trading was "reasonable", with two profits warnings a month later. (And another alert six weeks after that).

It isn't difficult to imagine Sinochem finding something to take issue with.

Rival bid?

Nor can investors bank on a counterbid.

Analysts have suggested a ream of names as potential buyers in the past, including America's Monsanto and Swiss-based Syngenta.

None have yet stepped forward.

If there are rival suitors around, they are keeping their cards close to their chest.

Rising tide

But even if Nufarm does end up remaining independent, it is not certain that investors have a huge amount to lose.

The fair value of the shares is Aus$10.70, according to Deutsche Bank, less than 7% below Tuesday's closing price of Aus$11.43.

Indeed, Nufarm shares might have approached that kind of level even without Sinochem's help. Sydney stocks have been on a roll since the Sinochem bid was revealed, jumping 17%.

Upside

Conversely, there is the potential for a big profit. Factoring in a dividend payment, Sinochem's current proposal would give buyers of Nufarm shares at Aus$11.43 a return of 15%.

That's good going, even though investors wouldn't get their money for a while. As currently conceived, Sinochem and Nufarm won't sign an implementation agreement until December.

Chinese companies have begun to look more serious buyers, even during the two months that the Sinochem-Nufarm deal has been gestating.

Even doubting investors might be best off keeping some skin in the game.

By By Mike Verdin

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