Poland M&A talks set stage for ZAP, ZAT 'mega-merger' - bank

26 July 2012 16:34  [Source: ICIS news]

LONDON (ICIS)--The Polish treasury ministry has emerged from a round of “M&A hardball” with Russia’s Acron Group with the opportunity of using a merger to create a “major league” Polish chemical player, an investment bank said on Thursday.

By thwarting mineral fertilizer producer Acron’s hostile bid for largest Polish chemical group Zaklady Azoty Tarnow (ZAT) “by playing a round of hardball and scoring a point for the domestic team [the ministry] has set the stage for the mega-merger of Poland’s two biggest fertilizer producers, ZAT and Zaklady Azotowe Pulawy (ZAP)”, Prague-based WOOD & Company said in an analysis.

“In an industry where size clearly matters, the consolidation of ZAP under ZAT’s name not only firms up ZAT’s dominant position in the Polish fertilizer market but also creates a diversified, heavyweight European player fit to compete in the global markets,” bank analyst Piotr Drozd said.

ZAT and ZAP combined, which the ministry, the controlling shareholder in both companies, estimates would make up Europe’s second largest fertilizer producer, represents “a compelling investment story” thanks to  large cost synergy potential, increased pricing power and balanced market/product exposure, he added.

However, WOOD & Company said it is initiating new coverage of the Polish chemical industry with a mixed outlook.

“Healthy fertilizer fundamentals [are likely] to be largely offset by cost creep and chemicals sector headwinds,” Drozd said.

“While we expect sector earnings to retreat from the record-breaking 2011 levels, the estimated 2012 margin compression seems to be already priced in by the market, in our opinion,” he added.

Tight global grain inventories, coupled with large-scale damage to estimated 2012/13 crops, pave the way for strong fertilizer pricing in 2013, but there would be a continued downside to chemical prices and margins stemming from easing end-product demand, the bank forecast.

“ZAP’s rigid cost base — it has the largest exposure to regulated natural gas prices — coupled with a soft outlook on the Asian caprolactam markets and the poor profitability of melamine, largely offsets the upside to fertiliser prices,” said Drozd.

“In this context, we turn to industry consolidation in search of stock price catalysts,” he added.

Investors should acknowledge risks stemming from the fact that there was not yet any approval from competition regulators for the proposed ZAT-ZAP merger, he added.

During the failure of its hostile bid for ZAT, Acron managed to secure a 12.03% stake in the group, which it has said it has no plans to build on.

ZAT has said that around zlotych (Zl) 100m ($29.1m, €23.9m) of immediate synergy savings and investment savings of Zl 200m should result from the merger with ZAP.

Together, the two companies should have annual revenues exceeding Zl 10bn, it has also estimated.

ZAP is largely a producer of nitrogen fertilizers, melamine and caprolactam (capro). ZAT produces nitrogen fertilizers, capro and polyamide 6 (nylon 6) and, in the past two years its product portfolio has been expanded with multi-component fertilizers, titanium dioxide (TiO2), oxo-alcohols and plasticisers.

This portfolio expansion was achieved through acquisitions made possible by the treasury using the group as a vehicle for a first wave of new consolidation in the Polish chemical industry.

ZAT and ZAP account for around 15%, or 2.2bn cubic metres, of Poland's annual gas use, a fact that analysts expect will give the merged entity greater gas price bargaining power.

($1 = €0.82)
($1 = Zl 3.44, €1 = Zl 4.18)

By: Will Conroy
+44 20 8652 3214

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