According to a report in The Australian, agricultural chemicals company Nufarm Limited (ASX:NUF) could be a potential takeover target.
Let's take a closer look at Nufarm's performance this year and why it's caught the attention of a buyout fund.
Why has Nufarm become a takeover target?
According to the report, Nufarm may be a potential takeover target from a United States (US)-based private equity fund. Although there has been no formal approach, it is believed that a US buyout fund could offer to buy the agricultural chemicals company, which is valued at $1.56 billion.
At the start of the year Nufarm reported that the company had $1.57 billion in debt, which sparked queries as the whether the company should raise equity in order to reduce debt. Takeover rumours have emerged as Nufarm's share price trades at levels not seen since 2014.
With the company's share price trading at such low levels, a takeover proposal would be opportunistic and most likely rejected by the Nufarm board. The seeds business itself is believed to be valued between $1.5 and $2 a share, and a takeover at the current share price would mean that Nufarm's chemical operations would be acquired at a bargain.
How has Nufarm performed this year?
The Nufarm share price has taken a nosedive in 2019, down more than 26% for the year. Drought in Australia and floods in the US have affected crop and livestock production, reducing the demand for crop protection and casing an oversupply of product and reduction in profit margins. In addition, Nufarm continues to suffer supply-chain and registration headaches in its Europe division. A court in the US has also found a link between Nufarm's glyphosate herbicide as a cause of cancer and is likely to face further legal action, which could be a deterrent for a takeover.
Earlier this year Nufarm downgraded its full-year forecast for earnings before interest, taxation, depreciation and amortisation (EBITDA) from a range of $500–530 million to $440–470 million. Currently, Nufarm is the second most shorted stock on the ASX with a 17.78% short holding in the company.
Nufarm's seed business is a bright spot in the company with a promising future. The company's seed operations include canola, sorghum and sunflower seeds and oils. Of particular interest is Nufarm's development of an omega 3 fatty acid derived from canola, which contains the same levels of DHA as fish oil and could have great potential for human health. It is reported that shareholders were eager earlier this year to break up the business and spin-off the lucrative seed operations as a separate entity.
Shares in Nufarm are trading slightly higher, up nearly 3% in morning trade.
