Arysta's business is completely complementary to ours, said UPL Group CEO Jai Shroff in an interview. The CEO said in his conversation with Nimesh Shah that UPL knows the asset very well and was surprised by how complimentary the business is.

Here is the excerpts from the interview-

Q: You have broadly given the details about the whole deal, the structure and everything but quickly if you can tell us the whole contours of the deal?

A: We know this asset very well. About a year ago they followed a process to sell it, we did a complete due diligence and then we couldn't agree on the deal. It came back again about 60 days ago and we were able to move quite quickly because we were able to agree and we were quite confident that business of Arysta is completely complementary. We were surprised how complimentary the business is and how much optimisation we could do to the business to make sure that it becomes very profitable for us and it becomes very accretive to us.

We were in discussions with ADIA for a long time, they have been talking to us about possibly doing something with us even before this deal emerged. When this deal emerged they agreed to partner with us on this deal.

Q: From 12 months back to now because you have closed this deal in the last two months, what has really changed and what made you finally decide to pay USD 4.2 billion to buy this asset?

A: We think it is an extremely good deal because we have cost optimisation, what we have announced is a very conservative number of about USD 200 million. We have sales synergies which will be in excess of that and that makes it a very accretive deal and what we are paying for is much lower than what it looks like today.

As far as Arysta's business, it is a high quality business, their earnings have gone from almost USD 350 million to USD 420 million, projected to be USD 460-480 million this year, that makes it a very attractive deal for us.

Q: To break up this whole deal - USD 1.2 billion is equity which you are going to pay through UPL Corp which is 100 percent subsidiary of Mauritius and USD 3 billion of debt. The biggest worry for investors right now is the huge debt that you are looking to get for the deal to go through. How are you going to allay the fears of the huge debt?

A: Financially UPL has always been very conservative. We believe that we are an investment grade company. We have spoken to all the rating agencies and they have confirmed to us that they will even after this deal maintain investment rating grade for us.

We have got financing at very attractive terms, financing costs are below 4 percent for the whole transaction. They have given us a USD 3 billion loan with a bullet payment at the end of 5 years. So, there is no stress on the company.

We believe that just UPL on its own Arysta on its own are probably the fastest growing companies. We believe that UPL will continue to grow at 10-15 percent and Arysta also has growth plans and with that our earnings growth for both the companies are expected to grow proportionally.

Q: Historically UPL has paid around 6 or 7 times earnings for their overseas acquisitions. This time you all have paid close to 10x on the FY18 EBITDA numbers that Arysta has reported. Why such a premium?

A: It looks like a premium but when you look at the complementarity of both the businesses, the synergies which we have, the distribution leverage which we will get because of our size, it is well inline with what we have paid in the past. In fact I believe it is even lower if you look at the optimistic view. Even in the worst case scenario we had our consultants review all our projections. Our partners ADIA and TPG both also reviewed our projections and we halved that and then we are talking about numbers.

So, I believe that this deal for UPL shareholders is fantastic. I think as time goes on and they understand better the details of the complementarity of the business and how much we will be able to benefit and how much leverage we will be able to get on the ground with a bigger size business in the US, Brazil, South America, Europe, Africa, East Europe, which are all growing markets, emerging markets we will have tremendous strength.

Even our product portfolio is completely complimentary. We have very little product overlaps. So, that also gives us a complete portfolio. We will have one of the largest portfolios of any company in the industry worldwide. Even with companies bigger than us we will have a much better portfolio.

The biological solutions business of Arysta is fantastic. The world is talking about food safety etc and this whole portfolio is going to continue to grow.

UPL has launched some businesses in bio-solutions. We have our whole drought climate smart technologies, and all that with size, we will be able to rollout our projects much faster.

Q: Given the lumpy style of the businesses of Arysta for the last four years, there was a bit of doubt on the USD 450 million run rate which Arysta is going to deliver. Are you confident that at USD 450 million, an upside is possible in 2019 and 2020 from Arysta?

A: I think it should be better than that. I am confident that from whatever we have seen, markets are improving. Arysta went through a merger of three companies, all that integration has just happened, they have put it altogether and we are buying it just at the right time where all the benefits of all the integration which they have done on their side and they are manufacturing lite company, UPL is a strong manufacturing company, that is our core competence, so that is also completely complimentary.

We think we will be able to get huge benefit out of that.

Q: If you can now explain to us the synergies that you are talking about because in the press release you have said close to USD 200 million of EBITDA synergy that you are going to gain in 2020. If you can just break it up in terms of product, in terms of geography, how is it going to benefit you?

A: That is really optimising synergies. We haven't even talked about sales synergies but if you look at our businesses, it is completely complimentary. So, if you look at their focus in Brazil, they are on fruit trees, wines, we are on row crops - cotton, Soybean, corns, so it is completely complimentary. Our portfolio exists but we don't sell to those customers. They don't sell so much in the Soybean, cotton area.

In markets like Chile, we are non-existent, they are market leaders. So, our whole portfolio which we have, we will get through that.

We have very little presence in East Europe, Russia, they are very strong there and these are high growth markets. Africa - a high growth market, they are very strong there, they are the leader in Africa, UPL has a small presence, this will give us a huge jump.

So, other than the cost optimisation and rationalisation synergies, we think that sales synergies are even much more which we really haven't talked about to our analysts either.

Q: What about the geographical synergies because I got a brief idea about few countries where you are not there, you will get an access to those. However you are there in Latam, you are there in lot of the other overseas markets as well, how much of that is going to be synergised and how much there is overlap as far as geographical presence is concerned?

A: Arysta has been with Japanese parentage, they have lot of niche products for niche crops, UPL is more in the large crops. So, this whole portfolio of theirs brings us into fruits, vegetable markets and that is completely complimentary. We have a portfolio which can sell but we have never put any effort and now with their sales team and their access to all these customers, we can sell there.

In many other markets if you look, they have a fantastic portfolio of biological solutions, our products and theirs it is completely complimentary.

Also they have portfolio of patented products, we have our portfolio, combining these products to give more complete solutions will give us a huge advantage in markets and particularly to give farmers more complete solutions.

Q: In the USD 4.2 billion that you are paying all cash, if you can just briefly tell us what sort of goodwill amount is there which is part of the whole deal, so that it gives a fair idea for investors on how to value this company?

A: Our business is a very IP oriented business and they have a lot of patents, we have a lot of patents. Fortunately they don't have manufacturing assets, they have some formulation plants and these are also very complimentary. We believe that we will be able to use each others strengths there.

They have some manufacturing facilities in different parts of the world and we have too. In terms of goodwill, when you look at the earnings and the ability to get synergies, yes we will do it and we will write it off over 15 years. We don't believe that it will impact our earnings. Our earnings will continue to grow and this is an EPS accretive deal.

Q: In the press release you have said by 2020 you expect Rs 10-12 EPS accretion for the combined entity. Just share the vision with us as to what sort of number you look for in terms of combined sales and combined EBITDA for the whole group in 2020 once the synergies start flowing in?

A: I believe that UPL, Arysta both are growth oriented companies. Both the companies have forecasted growth. Markets are very buoyant right now, we are seeing good sales at UPL and I am sure they are too. They are ahead of budget in their business as whatever we saw when we were looking at details. We think that will continue. We expect this year's sales to be close to USD 5 billion and I won't be surprised if we continue to grow at, at least 10 percent, so it should be close to USD 5.5 billion in 2020 in terms of topline.

Q: In terms of EBITDA what is the internal projection?

A: Both the companies are about 20-21 percent EBOTDA. We think with optimisation we should get it up a little bit more. So, may be 21-22 percent.

Q: The whole point was whether the 20-21 percent which UPL is delivering right now, in the post-merger scenario will that continue or will that be a dilution?

A: There won't be any dilution. We believe it will improve.

Q: The other part was the UPL Corp through which you have done this whole deal - USD 3 billion of debt and USD 1.2 billion as commitment coming in from ADIA and TPG. They will be holding 22 percent in UPL Corp. Tell us what is the deal with them as to by when they have an exit option in UPL Corp and whether you will also participate in that?

A: ADIA is a long term investor and whatever we understand is, they like the sector. Food security is an exciting space for investment for many of the large funds and particularly sovereigns. So, I think that they are looking at it long term. We have had some discussions but we will have a board and we will discuss it. There is nothing documented.

Q: Is listing an option for UPL Corp going forward?

A: Yes.

Q: Is that going to be one of the options for exit?

A: Yes absolutely.

Q: Will that be in 2020-2021 or there is a timeline to it?

A: We haven't discussed timelines. They are looking at it long term. They said lets run the business, let us not worry about that. If business is successful then I am sure we will find the right solution for them.

Q: In USD 3 billion that you are taking as debt, what sort of numbers you have worked out in terms of payback period for UPL?

A: As I said earlier, we are investment grade, we believe that our leverage in 2020 will be less than 3 - 2.5. We believe that in a matter of three years we should be able to generate enough cash from the business to repay this. Of course ours is a five year loan.

Q: When you are talking about three years, you are talking from 2020 when the synergy starts flowing in?

A: Yes. Accumulated with the synergies and with the growth in the company, we already are billion dollar EBITDA company and with the growth we will be able to generate enough cash to be able to have very low amount of leverage on the company.

Q: Tell us about Arysta, as Indian investors we don't know much about that company. You have done enough due diligence in the last one year, I believe they follow a very asset light model, is that going to change? What is the next game plan for Arysta once it gets folded into UPL?

A: Arysta has developed a very interesting model. Unlike UPL where we invest in plants and basic manufacturing, they are a company which have the ability to licence or contract manufacture with many companies in China, in India, in Europe and I think it has worked very well for them. I am excited to learn how they do it, use our expertise and then leverage on that capability to also outsource more manufacturing.

Q: With this acquisition I believe UPL leapfrogs into top 5 in terms of global agro players. After this acquisition is done, digested with, is there a goal for UPL to be in the top 1 or top 2? Will you guys be looking for more acquisitions in the future?

A: If you look at our past, every 5 years we have really grown a lot. So, every 5 years we almost double our business since inception. So, we are growth oriented company, I don't want to promise something but once we put the business together, we believe that in this industry size matters and it is going to allow us to invest in new technologies, new solutions, bringing a much more complete portfolio to deal with farmers. So, it is very positive and it will give us a big edge. They are very strong on seed treatment technology, they have bio-solutions business, all these things are the businesses of the future and bringing that in UPLs portfolio will really help us to give an integrated solution to the farmers.

Q: The biggest fear for investors right now is the big debt and the kind of synergies that you are going to get from the merged entity. Are you confident of achieving your numbers of 2020 of merged synergies of close to USD 200 million of EBITDA?

A: We are very comfortable. These are conservative numbers. We have had lots of discussions around this and we believe that there is no issue in terms of the debt. We remain investment grade. I think the rating agencies are extremely conservative, they wouldn't have given that if there was any chance of that.

First Published:Jul 21, 2018 6:14 PM IST