Fitch on Monday revised its ratings outlook on UPL Corp to negative from stable, citing an increase in the company’s leverage. Shares of UPL, however, closed 14.79% higher at Rs 631.65 on the BSE on Monday. UPL on Friday announced the acquisition of Arysta LifeScience and its subsidiaries by its Mauritius-based subsidiary UPL Corp for approximately $4.2 billion in cash from Platform Specialty Products.
Analysts at Edelweiss have raised concerns over the leveraged balance sheet, arguing that the benefits will be more back-ended. The brokerage indicated that the management guidance of synergy benefits of around $200 million or 20% of combined Ebitda (earnings before interest, tax and depreciation) the second year onwards and $100 million in the first year of operation are “optimistic”.
“We remain cautious about such aggressive synergy benefits and maintain the benefits will be more back-ended. We also believe that UPL will have to further invest towards expanding its manufacturing capacities to benefit from reduction in manufacturing and processing,” they wrote. In a release, Fitch said the “negative outlook on UPL Corp reflects the increase in UPL’s leverage and uncertainty whether UPL will be able to deleverage so as to not exceed Fitch’s thresholds for considering negative rating action”.
UPL had indicated last week that it intended to use a mix of newly issued equity and debt to finance the transaction. A wholly-owned subsidiary of the Abu Dhabi Investment Authority (ADIA) and TPG Capital Asia will invest a total of $1.2 billion —$600 million each— for an approximately 22% combined shareholding in UPL to facilitate the acquisition.
For the remaining $3 billion, UPL said it has received debt financing commitments, with bullet maturity of five years, from MUFG Bank and Coöperatieve Rabobank (Hong Kong Branch). Fitch elaborated that with the acquisition of Arysta, it expects UPL to become the world’s largest post-patent player globally, to almost double its FY18 Ebitda, and to add Arysta’s research-based differentiation to its cost advantage. “However, the rate of deleveraging will depend on the company unlocking significant cost and revenue synergies through successful integration, and broader industry fundamentals,” it said.
UPL expects the annual run-rate synergies of over $200 million, along with significant opportunity to drive revenue growth from the combination from the broader portfolio, geographic presence and shared innovation capabilities. “UPL expects the acquisition to be EPS accretive by ~`10 to 12 per share in FY20,” it had said.