| HONG KONG
HONG KONG A possible merger with fellow Chinese state-owned group Sinochem could bring welcome relief to debt-laden chemicals giant ChemChina as it looks to wrap up its $43.5 billion acquisition of Swiss-based seeds company Syngenta.
Led by its chairman Ren Jianxin, a dynamic entrepreneur in the monochrome world of Chinese state-controlled enterprises, ChemChina has aggressively bought assets at home and abroad, including last year's $7.7 billion purchase of Italian tyre maker Pirelli and this year's bid for Syngenta, China's biggest overseas acquisition.
But these bold buys have left China National Chemical Corp, popularly called ChemChina, highly leveraged.
Reuters reported last week that Sinochem and ChemChina are in talks about a possible merger to create a chemicals, fertiliser and oil giant with almost $100 billion in annual revenue. Both companies denied the merger plans.
"The (ChemChina and Sinochem) merger is positive to our loan, because Sinochem is much stronger financially than ChemChina," said a Chinese banker directly involved in ChemChina's $12.7 billion bridge loan backing the Syngenta acquisition. "ChemChina has been buying assets abroad more actively than Sinochem, so it's more financially stretched."
ChemChina had accumulated debt of $37.5 billion on June 30, as well as two bridge loans worth nearly $33 billion to help finance the Syngenta deal.
By contrast, Sinochem, which employs more than 50,000 people in China, has outstanding debt worth $11.55 billion and annual operating revenue last year of around $60 billion, according to Thomson Reuters data and the company's website.
"If Sinochem and ChemChina merged it would create a larger entity, more strategically important to the government, making it more likely to be supported in the Syngenta deal," said Kalai Pillay, senior director at Fitch Ratings. "It would be highly credit positive, as it would give more access to funding."
According to one former Sinochem senior official, the merger is being orchestrated by Beijing to improve ChemChina's financing prospects, which are weakened by the Syngenta deal, rather than a desire to reform China's chemicals industry.
"Sinochem's financials are better than ChemChina's. (A merger) will also be beneficial to ChemChina's equity raising for the Syngenta buy," said a person at a government-backed fund which is involved in Chinese outbound mergers and acquisitions.
ChemChina has won the green light for its takeover of Syngenta from U.S. regulator CFIUS, which vets foreign takeovers for potential security concerns. The Chinese group is now trying to clear antitrust approval with the European Union, with a decision expected by Oct. 28.
The European Commission is looking to approve the merger after ChemChina and Syngenta offered to make concessions to overcome antitrust concerns.
Neither the U.S. nor EU regulator singled out debt as a main concern in the antitrust review.
But the high debt burden puts a strain on ChemChina's cost of funding going forward, something that could be addressed if it merges with a financially stronger partner, bankers say.
If its agreed bid for Syngenta fails, ChemChina faces paying an unusually high $3 billion break-up fee.
"The loan contract has already been signed. We are waiting for the (ChemChina/Syngenta) deal to get final regulatory approvals before the facility can be drawn," the Chinese banker said.
Some bankers said Beijing will be careful not to jeopardise the Syngenta deal with any last-minute changes to its structure that could draw unwanted regulatory scrutiny.
"There's no way they can start merger talks before wrapping up the Syngenta deal," said a senior Hong Kong-based banker who has worked with both the Chinese companies.
"They will have to disclose the plans to global regulators and it will be a breach of trust if they fail to do so."
($1 = 6.6685 Chinese yuan renminbi)
(Reporting by Carol Zhong and Umesh Desai, with additional reporting by Denny Thomas, Julie Zhu and Yan Jiang; Writing by Lisa Jucca; Editing by Ian Geoghegan)