Agrium Inc. has agreed to pay $74.4 million for a 19.6 percent stake in Hanfeng Evergreen Inc., a leading provider of slow and controlled release fertilizers in China. Hanfeng announced April 2 that it has entered into separate agreements, one with Agrium Advanced Technologies (Agrium AT), a business segment of Agrium, and one with PetroChina Ningxia Petrochemical Co. (PetroChina), a division of PetroChina Petrochemical Co., to further expand its slow and controlled release fertilizer business in the domestic market in China and into international markets, including North America.
Hanfeng and Agrium AT have agreed to work cooperatively to develop and enhance their product offerings to both companies’ customers.
Agrium AT has agreed to subscribe for 11,959,000 common shares of Hanfeng, purchased for cash at $6.22 per share, representing an investment of approximately $74.4 million. This 19.6 percent stake will be approximately equal to that of Mr. Xinduo Yu, Hanfeng’s largest shareholder and CEO.
Two nominees of Agrium AT will join Hanfeng’s board of directors, and Agrium AT will be entitled to maintain board representation proportionate to its ownership. If Hanfeng issues shares in the future, Agrium AT will have the right to subscribe to maintain its proportionate interest in the company. Agrium AT and Yu have granted each other a right of first refusal if either wishes to sell their Hanfeng shares in any significant quantity over the next five years. Agrium AT and Yu have also agreed to a provision preventing either of them from acquiring more than 25 percent of the outstanding shares of Hanfeng, except pursuant to an offer for all shares.
Oakwest Corp. Ltd., a company of which Robert Beutel, Hanfeng’s chairman, is a principal and which currently owns approximately 2.3 percent of Hanfeng, has also agreed to a provision not to increase its ownership beyond 5 percent for the next two years. Yu and Oakwest have agreed not to dispose of more than 25 percent of their shares without Agrium AT’s consent – for five years in Yu’s case and two years in Oakwest’s case.
“Agrium recognizes both the enormous potential of the China market and Hanfeng’s operational and technical expertise,” stated Michael Wilson, Agrium president and CEO. “In partnering with them, we feel that both companies are now in a very strong position to enhance product offerings in our respective markets.”
Agrium AT and Hanfeng have an existing exclusive licensing agreement in place regarding production technologies for sulfur-coated urea (SCU). In connection with the new alliance, that SCU agreement has been amended. Hanfeng will establish a new wholly-owned subsidiary, Holdco, which will hold the rights to the SCU agreement. The purpose of Holdco will be to explore new SCU projects and joint venture opportunities in China. Hanfeng has granted Agrium AT an option to acquire 50 percent of Holdco. The option may be exercised by Agrium AT at any time between six and 24 months after closing.
Hanfeng has agreed to enter into a jv with PetroChina that combines Hanfeng’s technical expertise in slow and controlled fertilizers and its ability to construct and operate production facilities with China’s largest urea producer. Through their jv, the companies intend to construct facilities that would utilize urea produced by PetroChina and Hanfeng’s proprietary technology to produce SCU.
PetroChina will purchase 1 million common shares of Hanfeng at a price of $6.22 per share, representing an investment of approximately $6.2 million and approximately 1.6 percent of the outstanding shares, after giving effect to both issues.
Proceeds from the two share issuances will be utilized by Hanfeng to fund additional fertilizer production facilities, to reduce debt, and to fund expansions at the company’s Heilongjiang and Jiangsu facilities. Hanfeng is currently in the process of completing feasibility studies.