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Shares in Nufarm (ASX: NUF) have surged 35 per cent in early trading after the crop protection company announced it had entered a deal to sell its South American operations for $1.188 billion.
Japan's Sumitomo Chemical Company intends to buy Nufarm South America, which includes crop protection and seed treatment operations in Brazil, Argentina, Colombia and Chile.
The price represents a multiple of around 10x FY19 underlying EBITDA, and Nufarm CEO Greg Hunt believes it presents compelling value to shareholders while bringing an opportunity to refocus on other parts of the business with potentially higher margins and stronger cash flow.
"We have a very capable management and commercial team in South America who have built a strong distribution network and loyal customer base," says Hunt.
"This is reflected in the growth and stabilisation of earnings in the business over the past five years.
"The significant reinvestment we have made in our European, Nuseed and North American businesses in recent years, along with the next phase of transformation in our Australian business, is expected to deliver earnings growth and improved returns for shareholders in the coming years."
Nufarm has also extended existing arrangements with Sumitomo in addition to new ones with the Japanese conglomerate.
Nufarm has been confirmed as the preferred commercialisation partner for Sumitomo's proprietary fungicides Pavecto and Indiflin in Germany, Poland and the UK. They have also entered a transitional agreement whereby Nufarm will provide procurement services and continued supply of certain products to the South American businesses.
"Our commercial relationship with Sumitomo provides access to an attractive portfolio of proprietary products and will continue to be an important contributor to our growth," says Hunt.
"Today's agreement extends the term of our existing relationship and provides new opportunities to build on our expanding product portfolio in Europe."
Sumitomo Chemical executive vice president Ray Nishimoto highlights Nufarm's strong distribution network in South America, and claims the transaction will realise value for shareholders in both companies.
"We look forward to continuing our long-term relationship with Nufarm as a strategic partner and major shareholder," says Nishimoto.
NUF shares were trading at $6 each at 10:25am AEST.
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