Some of the world's largest agricultural companies are looking
to combine with one another as three years of shriveling crop
prices have pressured profits, in what would be the industry's
first big shake-up in at least a decade.
Syngenta AG is discussing with DuPont Co. a potential
combination with DuPont's agriculture division, according to people
familiar with the matter. DuPont is also separately discussing a
potential alternative agriculture deal with Dow Chemical Co., which
is exploring a sale of its seed and pesticide unit, another person
familiar with the matter said.
The discussions are at an early stage and may result in no deal,
the people said.
But the deal talk has clearly gathered steam since Monsanto Co.
in August abandoned its effort to acquire Syngenta for as much as
$46 billion after being rebuffed by the Swiss company. That deal
would have created the world's largest supplier of seeds and
pesticides, but Monsanto now could face the threat of much-enlarged
competitors if its rivals end up combining and it strikes no
combination of its own, analysts say.
Executives have publicly signaled their interest in
consolidating, without being specific. Edward Breen, who became
DuPont Co.'s interim chief executive on Oct. 16 following the
departure of Ellen Kullman, said last week he has been discussing
deals with his counterparts.
"Everyone is talking to everyone," said Dow Chemical CEO Andrew
Liveris on a conference call last month, when his company announced
it is exploring deal possibilities for its agriculture
division.
U.S. farm income is on pace to hit its lowest level in nearly a
decade, pressuring profits in the global market for genetically
modified seeds and chemicals to kill weeds and insects. The
manufacturers also face growing challenges from pests developing
resistance to commonly used products, along with mounting consumer
scrutiny of crop chemicals and biotech seeds.
"The natural evolution is to get together, cut costs, combine
R&D efforts and get scale," said Ari Gendason, senior vice
president of corporate investments for Continental Grain Co., an
agriculture-focused holding company that has owned seed-company
stocks. "If one [merger] happens, more than one will happen."
The recent deal talks follow mounting investor pressure to
improve returns. Trian Fund Management LP has pushed for change at
DuPont, as has fellow activist fund Third Point LLC at Dow
Chemical, while some Syngenta shareholders in October formed a
group to protest Syngenta's spurning of Monsanto's advances.
Syngenta, whose CEO abruptly resigned last month, has said it is
selling its vegetable- and flower-seeds businesses and reviewing
its other seed businesses.
Inexpensive debt, competitive pressure to secure merger partners
and other factors have fueled a broader deal boom that has put 2015
on pace to be the biggest year on record for mergers and
acquisitions.
A series of multibillion-dollar deals around the start of last
decade formed the "big six" group of companies—which also includes
Bayer AG and BASF SE—that continue to dominate the global seed and
pesticide business. The sector's last sizable deal closed in 2007,
when Monsanto acquired top U.S. cottonseed developer Delta &
Pine Land Co. for $1.5 billion, according to data compiled by
Dealogic.
Farmers were enjoying a prosperous period thanks in part to
increased crop demand from expanding livestock and biofuel
industries, which helped sharply increase farm income and enabled
seed-and-pesticide makers to secure handsome margins for their
products.
But three straight years of bumper crops have swelled grain bins
around the world and pressured grain and oilseed prices. The U.S.
Department of Agriculture expects U.S. farm incomes to fall 36%
this year to the lowest level since 2006.
A combination of Syngenta with DuPont's agriculture unit would
control about 27% of global pesticide sales, according to data
compiled by Morgan Stanley. Analysts say such a combination may
require the divestment of Syngenta's U.S. seed business to smooth
antitrust concerns, as DuPont already controls 35% and 33% of the
U.S. corn-seed and soybean markets, respectively.
Syngenta would keep its corporate base in Switzerland as part of
any deal, according to a person familiar with the matter.
DuPont and Dow's agricultural operations combined would control
about 17% of the global market in pesticides, becoming a close No.
3 behind Syngenta and Bayer, according to Morgan Stanley. Dow's
seed business also may need to be divested in such a
combination.
Trian last year had pushed DuPont to split off its agriculture
unit, but Ms. Kullman had rejected the move as overly costly and
providing few clear benefits.
Most agriculture executives say that big crops and low commodity
prices are likely to continue, barring a major drought or pest
outbreak, deepening challenges for farmers and the companies that
supply them.
Brett Wong, an analyst with Piper Jaffray & Co., said the
current agricultural downturn "could be more elongated than people
might think."
Farmers, however, remain leery of the increased pricing power
that farm groups say could come with increased industry
concentration. Since 1995, the average cost of seeds has more than
tripled, while pesticide costs have risen about 11%, according to
USDA data that aren't adjusted for inflation.
Bob Young, chief economist with the American Farm Bureau
Federation, said he hasn't yet seen evidence that market
concentration is driving higher prices. But he noted that "there's
just not a whole lot of these guys left, and you almost get to
where you've got to take what they're going to hand you."
Write to Jacob Bunge at jacob.bunge@wsj.com, Shayndi Raice at
shayndi.raice@wsj.com and Eyk Henning at eyk.henning@wsj.com
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(END) Dow Jones Newswires
November 05, 2015 16:25 ET (21:25 GMT)
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