Agrochemicals – a Modern Love Story
Stakes in the Agrochemicals Market Are High and All Cards Are Not Yet on the Table
Until recently, few outsiders would have called the agricultural chemicals sector exciting. It’s hard to imagine, for example, a thriller or torrid love story or even a poem set in a soybean field, although the Scottish national poet Robert Burns did set some of his in rye fields two centuries ago.
In the 21st century, the flurry of M&A activity – in particular the hitherto wholly unexpected merger plans of Dow and DuPont and the prospect that ownership of some of the world’s most crop protection technology will devolve to China – is adding global drama to this usually quiet business. Market watchers are on the edge of their seats as the next chapter unfolds.
To put it somewhat irreverently, in the not-too-distant past the agrochemicals market was a fairly solid and straightforward story. Before the need to keep a step ahead of the competition and ever stricter environmental legislation shifted the perspective toward developing innovative new products it seemed to be mostly about which producer could convince the most farmers to spread the most chemicals across the most fields in a short growing season.
Where the spotlight was once on developing new wipe-out herbicides, insecticides and fungicides, today’s market challenges are seed treatment and plant biology, foremostly genetic manipulation of crops for even greater and broader yields. Only companies with vast financial and physical resources can keep up with the trends, developing or buying the needed technology. Little surprise, then, that the race to take over competitors with the right puzzle pieces is showing signs of overheating.
Bigger Is Better
As population growth and the trend to larger, often industrialized, farming increasingly set the backdrop for market movements, it seems clear to all players that being bigger is the better way to cut a larger slice of the pie, which itself is growing. Compared with the 1990s, the figures are mind-boggling. In 2015, the global chemical seed treatment market was estimated to be worth nearly $4 billion and it now looks set to cross the $6 billion threshold by 2020, while the value of the bioinsecticides market is forecast to pass $774 million by 2020.
Especially when companies cast the specter of world hunger and the security of the food supply on the wall to underscore the need for access to certain molecules, the current buy-and-sell frenzy in the agriculture sector sometimes makes for captivating reading.
Behind the scenes, however, the process of consolidation has been in progress for more than three decades. The portfolios of today’s global market leaders largely reflect the merger spree of the 1990s, though the M&A of a decade earlier was worth taking notice of.
Monsanto’s Path to the Top
Due especially to Monsanto’s enormous acquisition appetite and its drive to tighten its grip on the seeds market (never anticipating a formidable rival such as the proposed DowDuPont in its midst), the US agrochemicals market has become more monolithic than Europe’s. A recent report by equity research and economic analysis group CLSA Americas asserts, too, that Monsanto’s path to the top was paved by the inertia of its rivals on two continents.
Firstly, the analysis goes, DuPont failed to adequately utilize the resources it picked up with the buyout of a seed treatment pioneer, the company aptly named Pioneer, in the late 1990s. The failure especially of major European players such as Syngenta to recognize what would be the wave of the future is also given credit –or blamed – for Monsanto’s rise. Preoccupied with integrating different corporate cultures from different companies, the Europeans may have not been focused enough on the goal, some observers say.
Syngenta, the soon-to-be blushing Swiss bride of a “Chinaman,” is the result of a complex series of swap-and-trade transactions dating from 1996, when the two Swiss giants Sandoz and Ciba-Geigy pooled their agricultural chemicals assets to leverage synergies, just as they merged their pharmaceutical activities into Novartis and their specialty chemicals businesses into Clariant.
The carefully crafted portfolios and the exploitation of the two Swiss companies’ chemical crop protection products gave rise to a formidable force in this conventional market, making Syngenta an attractive match for both seeds-heavy Monsanto and technology-hungry ChemChina.
Bayer CropScience in its current form emerged from another spectacular deal, the group’s headline-grabbing €7.25 billion acquisition in 2002 of Aventis CropScience, a company resulting from the 1999 merger of the agrochemical assets of erstwhile French and German chemical industry heavyweights Rhone-Poulenc and Hoechst. From a European perspective, this was not unlike the planned DowDuPont fusion. Here, Bayer was able to pick up important assets, both in seed traits and plant engineering.
Aventis CropScience, which could trace part of its history to the 1983 agrochemicals merger of Hoechst and Berlin-based chemical-pharmaceutical producer Schering to form AgrEvo, was itself not an old company. Three years before this deal, Schering had acquired Britain’s newly merged Fisons-Boots. The number of players shrank again three years later, when Rhone-Poulenc took over the relevant business of US-based Union Carbide for $575 million in 1986.
Short-lived AgrEvo, built up with great fanfare, was a pioneer in its own right, sowing many of the seeds that have grown into Bayer CropScience products. While German companies were just initiating collaborations with research institutes, many of the seeds of change had already been germinated in British think tanks acquired by Fisons-Boots. It was AgrEvo that took the first baby steps toward gene manipulation with its €1 billion acquisition of Belgium's Plant Genetic Systems in 1999 – shortly before Aventis rose from the Franco-German ashes.
Gazing into the crystal ball to predict the future of the agrochemicals market, it’s not always easy for analysts or other skilled observers to see how it will be recombined. When others collect the “spoils” of the ongoing M&A rounds that merger partners will be forced to divest, the makeup of individual segments or whole companies may shift quickly. Already, perceptions of where the players stand may deceive. While Monsanto is generally acknowledged to dominate the seeds segment, this seems to be only partially true.
According to CLSA’s research, Syngenta’s seeds portfolio, though much smaller, is more balanced than that of Monsanto, and the portfolios of DuPont and Dow tilt strongly toward traits. Bayer and BASF, the smallest players in seeds altogether, are focused almost solely on traits – which actually puts them both ahead of Monsanto here. To paint a clearer picture of what various players are looking for in a deal, the researchers lumped together the companies’ seeds, traits and crop protection assets as if they were of equal importance, without considering the knock-on effects of uncompleted deals that certainly would require divestments.
Although it means nothing in terms of actual market clout, their conclusion was that pre-merger DuPont had the most overall leverage, followed by Syngenta and Monsanto. In this scenario, which way the final bargaining chips fall will depend on which company needs to fill which hole in its portfolio and how much money it is ready to put on the table.
In the end, the game may be played by different rules. Speculation rampant as this issue went to press suggested that the market giants may have a few tricks up their corporate sleeves. Reports that BASF – world’s largest chemical producer in terms of sales – had or might still be maneuvering behind the scenes to prevent the DowDuPont-merger from going ahead, if regulatory authorities didn’t intervene to kilI first, were followed by talk that Monsanto had made a $30 billion offer to buy all of Bayer CropScience.
Another wild card in the deck is ChemChina’s need to borrow $35 billion – nearly all of the purchase price for Syngenta. The acquisition is the most expensive in China’s history. Western players could be expected to help finance the deal in exchange for some of the Swiss company’s more lucrative assets.