Recent news about the drought-like situation in Europe has brought UPL’s big-ticket acquisition of Arysta Lifesciences under the light. With increased exposure to Europe after the deal, UPL is at a much greater risk of being impacted due to the slowdown in the region.
In July 2018, UPL announced its heavyweight acquisition of the Arysta LifeScience for $4.2 billion (c. Rs 28,500 crore, UPLs market cap: Rs 38,353 crore). The deal was to be financed through a mix of debt and equity with $1.2 billion in equity and $3 billion in debt. The heavy leverage from the acquisition brought in scepticism amongst investors, however, the synergies from the deal indicated EPS (earnings per share) accretion from the first year. This led to a steady momentum in the stock post the deal announcement with a 36 percent uptick since then.
Arysta has a strong presence in the European agrochemical market with 39 percent business coming from the region. The deal increases UPL’s exposure to Europe from the current 13 percent to 24 percent.
With higher exposure to Europe, UPL is now at a greater risk to be impacted by the expected weakness in the European agrochemical market in the upcoming quarters. Recent news about the drought-like situation in Europe has brought in a sluggish outlook of the agrochemical demand in 2019 from the region. With dry and harsh weather, pest and fungus attacks are expected to reduce drastically which would stunt the demand for UPL’s products. Moreover, this might also lead to inventory pile up and added cost for the company.
With weakness in European business, the synergies and EPS accretion from the deal might be lower than initially expected, at least in the short run. While the Latin American market is expected to compensate a portion of the sluggishness in Europe, the weakness could still weigh on the performance of the combined entity in 2019.