SYDNEY - Sumitomo Chemical Corp agreed to buy a $590 million stake in Australian farm chemicals maker Nufarm Ltd on Tuesday, in a surprise deal that knocked out a rival bid from China's Sinochem.

While the deal evoked a tepid response from Nufarm and Sumitomo shareholders on Tuesday, it is seen by some as helping stabilize the Australian company and setting a floor for its shares after a series of profit downgrades.

The move would offer joint development and distribution opportunities for Sumitomo in agrochemicals, which the Japanese company sees as a global growth business. The deal, however, is a blow to Sinochem's growth ambitions.

Nufarm rejected a bid from state-owned Sinochem that had been cut to $2.3 billion, or A$12 per share, after the Chinese firm completed due diligence following six months of talks.

Sumitomo lost no time in striking a deal, agreeing to pay A$14 a share to buy up to a 20 percent stake in Nufarm and effectively setting a floor for Nufarm shares after predictions they could fall to as low as A$8.50 if the Sinochem deal fell through.

As it were, Sumitomo turned out to be the white knight waiting in the wings happy to give shareholders the opportunity to sell out part of their stake ... while retaining a decent percentage to benefit from a turnaround in performance, said Cameron Peacock, markets analyst with IG Markets.

Nufarm has cut its earnings forecasts three times this year, reflecting a slump in the price of its key herbicide, glyphosate, in the U.S. market and weaker sales volumes than it had expected.

Sumitomo's proposal places an appropriate value on the company and provides all Nufarm shareholders with the opportunity to realize a fair price for some of their shares, Nufarm Chairman Kerry Hoggard said.

Investors in Australia and Japan, however, were lukewarm to the deal.

Nufarm shares rose as much as 5.1 percent to A$11.10 after the announcement, but trimmed gains to close at A$10.86, valuing the company at A$2.4 billion ($2.1 billion). The benchmark S&P/ASX 200 index finished 1.1 percent higher.

Sumitomo shares ended flat at 403 yen.

The fact that it's not a full takeover and that they are only buying a 20 percent stake could be a concern for investors, said Steve Robinson, a fund manager with Alleron Investment Management, which does not own Nufarm shares.

DISTRIBUTION NETWORK EYED

Sumitomo had not decided on whether it might in the future look to raise its stake in Nufarm beyond 20 percent, spokesman Toshihiro Yamauchi said. The firm was considering business ties with Nufarm, including joint development of agricultural chemicals and mutual use of each other's sales channels.

We believe this market has growth potential, and we have been considering ways to increase the scale of our business, he said.

Sinochem had hoped to gain from Nufarm's global distribution network that includes Asia, South America and Europe.

Given the challenging and complicated environment in which Nufarm is operating in the future, Sinochem strongly believes that the revised offer was fair and in the best interests of all parties, Sinochem said in a statement on Tuesday.

On this basis, Sinochem sincerely regrets the decision of Nufarm's board of directors to decline the offer, it added.

Nufarm is being advised by UBS, while Royal Bank of Scotland had advised Sinochem. French bank SocGen advised Sumitomo on the deal, sources familiar with the matter told Reuters. The sources declined to be identified because they were not authorized to talk to the media.

Nufarm also said on Tuesday it would raise A$250 million in equity. Nufarm Managing Director Doug Rathbone owns an 11 percent stake in the company.

The end of the Sinochem talks marks the second time since 2007 that Nufarm has failed to strike a deal with a Chinese company.

Two years ago, Nufarm was approached by China National Chemical Corp, which led to an A$3 billion approach with U.S. private equity firms, but no formal offer emerged.

($1=1.128 Australian Dollar)

(Additional reporting by Nathan Layne in Tokyo and Michael Flaherty in Hong Kong)

(Editing by Jonathan Standing and Muralikumar Anantharaman)

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