This is a paid article which your subscription is allowing you to read.

An Indian company has made a R21.8m bid ($1.36m) for South African chemical and fertiliser group Omnia Holdings. When the offer from Solar Industries India was announced in the middle of September, it represented a 30% premium on the South African company’s share price. Omnia’s board has expressed its support for the bid.

There is much to recommend this deal. However, there are also negatives from the perspective of the South African investment community. Solar intends acquiring 100% of Omnia’s ordinary shares and making it a private, wholly owned subsidiary. The delisting will end Omnia’s 46-year history as a publicly traded company on the JSE.

Not only will this deprive South African investors of local access to a share that shows every sign of continuing to benefit from the African mining boom, but current shareholders, having cashed out, will not be exposed to any of this future upside. Furthermore, Solar has indicated that the deal will be financed by borrowing against the combined entity’s balance sheet. Both companies are currently virtually debt free.

But Solar is far from cash-flush, with reserves worth only about $62 million. This means that Solar is financing the deal by loading debt directly onto Omnia’s currently unencumbered balance sheet. The deal is thus much less generous than it appears at first glance, as Solar is using Omnia’s own pristine, debt-free financial strength to pay out its existing public shareholders.

Although Solar is a large defence contractor, with operations that include missiles, ammunition, and even space applications, its traditional core business is industrial explosives and detonation systems. The acquisition of Omnia is specifically aimed at making the company the dominant supplier of “mining solutions” across the Africa continent and beyond.

Omnia has two main legs. In mining it operates globally primarily through its BME division, which provides comprehensive solutions across the entire mining value chain — covering everything from the initial rock fragmentation and blasting to downstream chemical mineral processing and recovery. The company is one of three dominant South African explosive manufacturers, alongside AECI and Sasol.

In its second leg, agriculture, Omnia is one of the largest suppliers of ammonia-based fertiliser in the region. Fertiliser and plant nutrition was Omnia’s original business and the company has both a highly regarded research lab and offers wide-ranging advice to the agricultural sector. Critics of the proposed Solar take-over point out that the Indian company has no background in agriculture and wonder what will happen to this operation?

Listed South African companies are cheap against international benchmarks and Omnia is an appealing mid-cap option. While there is something affirming about foreign interest in local companies, deals like this tend to shut down local opportunities and have been regarded with ambiguity, at best, from a South African perspective.