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Investment case

Oro Agri

OMNIA EXPANDING ITS AGRIBIO RANGE THROUGH THE ACQUISITION OF ORO AGRI

During March 2018 Omnia entered into two separate agreements to acquire 100% of the ordinary shares of Oro Agri SEZC Limited (Oro Agri SEZC) and Oro Agri SA (Pty) Ltd (Oro Agri SA) for an aggregate maximum consideration of USD100 million. Reference herein, “Oro Agri” includes the Oro Agri group, of which Oro Agri SEZC is the ultimate holding company. The fulfilment of the condition precedents related to the acquisition agreements which were met after year-end with the effective closing date being 30 April 2018. From 1 May 2018, the results for Oro Agri will be consolidated into the FY2019 results.

Overview of Oro Agri

Oro Agri is an international company involved in the R&D, production, distribution and sales of a unique range of patented agriculture biological (AgriBio) products. The key product ranges include biostimulants, adjuvants, crop protection products, liquid foliar fertilizers and soil conditioners for large scale agriculture applications, including all row, stone fruit, pasture and other crop types, as well as smaller pasture, lawn and garden applications.

AgriBio products, which consist of biopesticides, biostimulants and biofertilizers are eco-friendly alternatives for crop protection, enhancement and nutrition. They can be used on their own or in combination with conventional products and traditional chemistries to significantly improve their effectiveness. The use of AgriBio products can substitute or significantly improve the effectiveness of traditional chemical-based pesticides, fungicides and herbicides. These products appear to be reaching their maximum performance levels due to growing resistance levels built-up by plants, insects and plant diseases over the years. The Oro Agri range of environmentally friendly products provides green solutions aimed at addressing traditional crop inhibiting diseases which stunt growth and reduce crop yield, increasing nutrient uptake and improving water use efficiency.

Oro Agri was established in the late 1990s and commenced operating as a corporate entity in the USA in 2002. The following year, PREV-AM® was registered as the first product of Oro Agri and sold as a bio-pesticide in the agriculture market. Since then, Oro Agri has expanded its global footprint across six continents and continued to develop a unique range of innovative products that include brands such as OROWET®, TransPhloem®, TRANSFORMER®, WETCIT®, OROCIT®, VINTRE® and OROBOOST®.

Oro Agri operates in four major regions in the world, namely Brazil, Europe, South Africa and the USA, with Asia Pacific an important fifth major region that is at an early stage of development. Aside from Europe, Oro Agri owns and operates in-house production and R&D facilities in the three other regions in which it has a presence. Plans are well underway to establish a strategically located facility in the Eurozone, expected to be completed during the 2019 financial year.

Oro Agri has a well-developed global sales and distribution network in more than 80 countries with an established network of distributors, agents and directly employed staff to market and sell its products. Target markets include countries with extensive agriculture production areas along with well-developed product registration systems and appropriate legislation to ensure the protection of Oro Agri’s intellectual property (IP).

Transaction rationale

Omnia’s Agriculture division is a market leader in plant nutrition products and services in South Africa and Southern Africa, working closely with customers to improve the performance of their crops for the last 65 years. Omnia is also recognised as an international player in the AgriBio and water soluble nutrient markets. Its product range is manufactured in South Africa and Australia and is currently sold into approximately 85 countries globally.

In line with the next phase of the “second green revolution” in the global agriculture sector, the demand for AgriBio products is further underpinned by the increasing emphasis on nutrient and water use efficiency, coupled with the rising demand for products that are environmentally friendly, improves human health, enhances crop performance and improves yields. This is in line with both Omnia and Oro Agri’s approach to the formulation and production of plant nutrition products over many decades.

AgriBio sciences are changing the future of agriculture and is gaining exceptional momentum as the world becomes more environmentally friendly and health conscious. The limitations of traditional chemicals can be overcome using AgriBio products, leading to increased food production despite the limitation in resources, thereby contributing to food security and a sustainable environment.

The rate at which the AgriBio industry, and Oro Agri’s market share of the industry is growing, testifies to the effectiveness of these products. For Omnia Fertilizer, it is the next step in the evolution of its stated growth strategy, built on the Nutriology concept.

Oro Agri is a high growth international AgriBio player with strong complimentary attributes to accelerate Omnia’s growth into key agriculture markets where Oro Agri is already well-established. For the past few decades, Omnia has been a leading player in conducting extensive R&D into plant nutrition, soil science and water usage in the agriculture sector and in developing related products, services and solutions for customers. The combined product ranges between the two companies complement one another and will provide a broader market offering of AgriBio products into the agriculture sector.

The sale and distribution of Omnia’s existing range of plant nutrients, biostimulant products and agriculture services, is expected to increase significantly by leveraging the Oro Agri global network. Omnia will eliminate the time, cost and risk associated with establishing a similar global network as well as the extensive R&D required to formulate comparable products to the same standard as Oro Agri. In so doing, Omnia will be able to focus on leveraging the synergies between the two companies in order to maximise the sales potential in these key markets. Omnia’s IP portfolio and product registrations process will be enhanced by the experience and knowledge of the Oro Agri team in the various jurisdictions in which it operates. The integration of Oro Agri into the existing Fertilizer business to quickly leverage synergies will receive the highest priority in the coming year.

An external professional services firm has been appointed to assist with providing advisory support on the development and refinement of an integration blueprint. Functional and business area reviews will be conducted to ensure that the strategy, areas of value creation and synergies are addressed in line with the integration blueprint. Significant progress has been made on the integration of Oro Agri into Omnia with the intention to realise synergies and improve the profitability of Oro Agri in the 2019 financial year.

Umongo Petroleum

The acquisition of a 90% interest in Umongo Petroleum was concluded effective 1 December 2017. Besides South Africa, where Umongo Petroleum has been operating for several years in the base oil, lubricant and speciality oil market, they have also recently been appointed by Chevron Oronite (additives) and Chevron Products (base oils) as the exclusive distributor in several countries in Africa in addition to their appointment in the same capacity in South Africa. Based on Omnia’s footprint in African, this will support Umongo Petroleum’s plans to expand its East and West Africa operations by connecting with existing service providers, leveraging our in-country knowledge and leveraging our economies of scale in logistics and transport. Further synergies have been identified across the chemical spectrum using both Omnia’s and Umongo Petroleum’s network of chemical suppliers, storage facilities and leveraging economies of scale across both operations.

Omnia, through its subsidiary Omnia Group Proprietary Limited, has entered into a sale of shares agreement (Agreement) with Lubricant Additives Solutions and Technology (Mauritius) (Lubricant Additives) and Autumn Storm Investments 294 Proprietary Limited (Autumn Storm), for 90% of the ordinary shares of Umongo Petroleum Proprietary Limited (Umongo Petroleum) for a maximum aggregate acquisition consideration of R780 million (the Transaction). The remaining 10% shareholding in Umongo Petroleum will continue to be held by Autumn Storm, an entity in which the current Chief Executive Officer, Mr. Boston Moonsamy, is a shareholder. Umongo Petroleum is a leading distributor of additives, base oils and other related petroleum, oil and lubricant products (product range) in South Africa and sub-Saharan Africa.

Umongo Petroleum background information

In 1998, American-based Chevron Oronite Company LLC (Chevron Oronite), appointed Mahmoud Homayoun via African Petroleum Additives Proprietary Limited (APAC), to represent it as an agent in South Africa servicing the requirements of the lubricant and fuel markets with Chevron Oronite lubricant and fuel additives. In 2005, Umongo Petroleum Additives was established as a distributor of Chevron Oronite for South Africa and sub-Saharan Africa. Umongo diversified its business activities to include distribution agreements with Chevron Products Company U.S.A. Inc. (Chevron Products Company), BASF SE (BASF) and Evonik Oil Additives GmbH (Evonik). This led to the change of its name to Umongo Petroleum.

Umongo Petroleum is based in Umhlanga Ridge, KwaZulu-Natal and currently employs 30 people. Umongo Petroleum operates a fully outsourced supply chain and logistics business model, using accredited storage facilities, transporters and other related service providers to import, store, process and deliver raw materials and finished products to customers. In addition, Umongo Petroleum offers a full range of technical support to customers that use its product range.

Key supplier relationships

Umongo Petroleum has supply and distribution agreements with various entities in the Chevron Group, a leading integrated energy company, for the supply both of additives from Chevron Oronite and of base oils from Chevron Products Company into the South African and sub-Saharan Africa markets. Chevron Oronite develops and markets quality additives that improve the performance of fuels and lubricants. Chevron Products Company provides reliable global base oils supplied through its production facilities. Chevron Products Company’s base oils are part of the global base oil slate, which allows base oil interchangeability and equivalency. Other key supplier relationships include BASF for lubricant additives and base stock and Evonik for oil additives.

Umongo Petroleum has concluded an agreement to acquire 100% of Orbichem Petrochemicals Proprietary Limited (Orbichem), the distributor of the Ergon range of products in South Africa and sub-Saharan Africa. Ergon is a leading global producer of specialty naphthenic oils and its primary product range consists of insulating oils (transformer oils), base oils (bright stock to enhance viscosity) and process oils (rubber processing).

Key personnel

In terms of the Agreement, Mr Moonsamy will remain as Umongo Petroleum’s Chief Executive Officer for five years and Mr Homayoun, as the founder and current chairman of Umongo Petroleum, will remain involved in Umongo as a member of the board and as a specialist advisor for four years. Other key members of the Umongo management team will remain with the business. Mr Homayoun holds an M.Sc. degree (University of Southampton) in automotive engine and vehicle design as well as an M.Sc. degree (University of Cranfi eld) in thermal power, specialising in rotating machinery engineering and management. He previously held senior positions at Caltex (USA) and Caltex (SA), including the role of Group chief product design engineer responsible for diesel oils, gasoline oils, 2T, 4T, railroad and marine oils. He was also responsible for the introduction of certain Group 2 base oils into the Caltex global network of blending plants.

Mr. Moonsamy holds a B.Sc. Chemistry and Biochemistry and B.Sc. Biochemistry (Honours) from the University of Durban Westville. He held various positions at Caltex Oil (SA), initially in a supervisory capacity overseeing the quality control of the manufacturing of lube oil and grease and later, as head of the supply chain department overseeing the import and local procurement of base oils, additives and packaging, and the production planning for lubricants, greases and petroleum jelly.

Transaction rationale

Omnia’s Chemicals division, operating under the Protea Chemicals brand (Protea Chemicals), has a wealth of experience and a reputation for excellence in the distribution of specialty, functional effect chemicals and polymers in sub- Saharan Africa. The operational similarities between Umongo Petroleum and Protea Chemicals present potentially attractive and synergistic opportunities to serve customers in South Africa and across the African continent, leveraging the combined presence in complementary operating regions and providing opportunities for expansion into unpenetrated frontier regions. Umongo Petroleum is a market-leading business which is complementary to Protea Chemicals and which will contribute to its product and market strategy. The addition of a bulk-volume base oil, additives and lubricants business to Protea Chemicals, will broaden its current product offering and create new opportunities to grow the business in South Africa and sub-Saharan Africa.

Terms of the transaction

In terms of the Agreement, Omnia, through its subsidiary Omnia Group Proprietary Limited, will acquire 90% of the ordinary shares of Umongo Petroleum for a maximum acquisition consideration of R780 million on a debt-free, cash-free basis. The acquisition consideration, for a 90% interest, is apportioned between an upfront cash payment of R618.5 million, an earn-out cash payment of a maximum aggregate amount of R121.5 million payable and a retention amount of R40 million. The maximum aggregate earn-out cash payment of R121.5 million is directly linked to the achievement of performance milestones over the three-year period to 28 February 2020.

The maximum annual amount payable in each of years 1 and 2 is R40.5 million per annum. Of the amounts earned on an annual basis, the first R45 million will be retained in respect of various warranties and indemnities, and will be released at a future date. The maximum aggregate earn-out less the R45 million retention amount, is R76.5 million and is payable over the three-year period. In terms of the retention amount of R40 million withheld in respect of warranties and indemnities, R25 million will be retained for at least three years (subject to certain conditions) and R15 million will be retained and paid out over a four-year period ending 30 June 2021.

In terms of the Agreement, Omnia retains a call option and Autumn Storm a put option over the remaining 10% shareholding in Umongo Petroleum. The call/put option will be exercisable five years after the closing date of the transaction and is subject to a revised valuation notice being delivered to Omnia/Autumn Storm at such future point in time. The call/put option will have a maximum settlement consideration of R115 million, with no minimum amount applicable.

Omnia funded the acquisition consideration through its existing general borrowing facilities. Umongo Petroleum was reported under the Chemicals division in the consolidated results. Umongo Petroleum will continue to operate as a separate stand-alone entity within Omnia. Omnia will ensure that the memorandum of incorporation of Umongo Petroleum does not frustrate or relieve Omnia in any manner from compliance with the JSE Listings Requirements.

Axioteq

A small acquisition of the LDR group of companies in South Africa and Zambia was completed in the year and consolidated into a new Omnia business called Axioteq which is reported as part of the Agriculture division. Axioteq is a cutting-edge data and services business that employs various technological tools to collect and utilise big data and machine learning techniques to provide more insight to customers and to support Omnia’s research and development initiatives in the agriculture space. The data collected through Axioteq can be processed in a meaningful manner, to provide expert agronomic solutions to agriculture clients or, if used in a similar way for the mining industry, then in terms of blasting solutions to mining clients. Further applications for this business is being investigated and will be actively pursued.

Nitrophosphate plant

The construction of a new Nitrophosphate plant at a capital cost of R630 million is progressing well and is expected to be completed by 31 March 2019.

Benefits:

  • The plant will allow Omnia to use phosphate rock as a phosphate source instead of the higher priced downstream alternatives such as Phosphoric acid
  • With the backward integration using phosphate rock, the new plant is expected to lead to an approximately 1.0 to 1.5 percentage point improvement in the operating margin of the Agriculture business once fully operational
  • Nitrophosphate, as a phosphate source, provides significant agronomic benefits and opportunities for Omnia to further differentiate its downstream products
  • Nitrophosphate production is also environmentally friendlier than the production of Phosphoric acid which generates as a byproduct, significant volumes of phosphate contaminated gypsum
  • Phosphate rock, as feedstock for the Nitrophosphate plant, can be sourced from various regional or international sources

Due to the expected shortage of Phosphoric acid and to reduce our reliance on our current monopolistic supplier in South Africa, it was decided to aim for an early start-up of the reaction section on the Nitrophosphate plant to produce mother liquor to be used in the granulation plant as a source of phosphate. This process enables the reaction of phosphate rock and nitric acid, without the removal of the calcium in the form of calcium nitrate, to create a source of phosphates.

Historical investment cases

2013 - 2017