It is only a matter of time before consolidation occurs among the big six companies in agriculture, say analysts and company executives.
“It appears the (agriculture) industry, in response to lower growth stemming from lower commodity prices, is on the cusp of substantial consolidation,” Deutsche Bank analyst David Begleiter said in a recent market research commentary.
Consolidation furor started with Monsanto’s failed US$46.5 billion hostile takeover bid for Syngenta earlier this year.
It flared up again following quarterly financial results reports from Dow Chemical and DuPont, in which executives discussed the prospects of becoming buyers or sellers.
DuPont is the world’s second largest seed company and sixth largest seller of crop protection products.
Dow ranks fourth in both categories.
The agriculture segments of both companies are experiencing declining sales because of falling crop prices and weakening currencies in key markets such as Brazil. Dow’s third quarter sales were down 16 percent from a year ago while DuPont’s fell 30 percent.
Dow chief executive officer Andrew Liveris said the company is considering selling its Dow AgroSciences business.
“There is a rationale in our opinion that given the potential synergies in a newly consolidating agricultural market, an attractive opportunity to release value may be upon us,” he said during an Oct. 22 conference call.
Liveris said the company will compare offers to the value of retaining Dow AgroSciences.
“But look, we believe that over time the hurdle of doing business in this sector will only keep increasing,” he said.
Liveris said Dow AgroSciences has doubled its earnings before interest, taxes, depreciation and amortization (EBITDA) over the last five years and has “the most envied” chemistry and traits pipeline in agriculture.
“We will extract full value in whatever construct we come out with that beats anything towards retention,” he said.
Liveris was asked if the company was in discussions with any potential partners.
“Literally since the Monsanto-Syngenta conversations began in May, you could imagine that every player talks to everyone,” he said.
“So, yes, we’re all talking to everyone. And there’s no imminent deal.”
Begleiter believes Dow is actively pursuing a buyer for its agriculture business, which represents 13 percent of the company’s sales and eight percent of its EBITDA.
“With the (agriculture) industry on the cusp of consolidation, we believe Dow is focused on choosing its partner as opposed to its partner being chosen for it,” he said in an Oct. 22 market research note.
“We believe a tax-free divestiture of (agriculture) will occur in the next 18 months.”
A story that ran on Seeking Alpha, a website about investment research, speculates Dow is considering divesting its agriculture business because its new Enlist weed control technology might not meet sales expectations.
Dow’s Enlist soybeans are tolerant to 2,4-D and glyphosate. They will be competing head-to-head with Monsanto’s Roundup Ready Xtend soybeans tolerant to dicamba and glyphosate.
The Seeking Alpha story references a Bloomberg article that says Dow is facing an uphill battle for market share in the next generation of genetically modified soybeans.
“Dow Chemical Co. is losing out to Monsanto Co. before either company’s product is available to U.S. farmers,” the Bloomberg story said.
That is because DuPont and Syngenta have said they are not going to license Dow’s Enlist genetics and Monsanto has said it will license for corn but not soybeans.
Those are the top three seed companies in the world. By contrast, DuPont is licensing Monsanto’s Extend soybean technology and Syngenta is considering it.
“Without those licensing accords, Dow’s market opportunity shrinks to at most 25 percent of U.S. soy acres,” the Bloomberg article said.
DuPont could be a potential buyer of Dow AgroSciences, depending on how comments made by the company’s senior executives are interpreted.
Begleiter asked Edward Breen, interim CEO of DuPont, if he foresees the big six in agriculture — Monsanto, Syngenta, Dow, DuPont, BASF and Bayer — becoming the big three or four.
Breen acknowledged that consolidation talks have been heating up.
“Look, who knows how fast it happens, but you’ve seen all the activity in the last six months,” he said.
“I am personally talking to the CEOs of some of the other companies, so something will give here on the (agriculture) side and I would say, just looking at it, consolidation should happen. So clearly, we will make sure we have our nose in the tent to see if there’s anything that makes great sense for our shareholders.”
One analyst said it sounds like DuPont would be a seller if the price was right.
“Yes. Let me answer it this way. We will do what’s right for our shareholders to create value for them that’s lasting value,” said Breen.
Begleiter said Breen has a track record of breaking up companies he runs.
He believes DuPont will be split into an agriculture, nutrition and biosciences company with 2015 EBITDA of $3 billion and a chemical and materials company with $2.8 billion of EBITDA.
“With the world’s second largest seed business and a top five crop chemical business, we expect DuPont to be an active player in industry consolidation,” he said in an Oct. 27 market research commentary.
Frank Mitch, senior analyst with Wells Fargo Securities, does not know what direction Breen will take the agriculture side of the business.
“We’re unclear if (DuPont) is a buyer or seller,” he said in an Oct. 27 commentary.
Executives with both companies blamed slumping crop input sales on Brazil, where the weak currency and lack of available credit makes inputs more costly and difficult to acquire.
They were not optimistic about a sales rebound in the coming year.
“We’re certainly taking a cautious view of 2016,” said James Borel, executive vice-president of DuPont.
“We’re not expecting a big market recovery overnight.”
However, Breen was optimistic about the growth opportunity in agriculture looking beyond next year.
“We’re in the bottom of the down cycle right now. We’re hopefully close to it. So clearly there’s a big opportunity there, and everyone’s seen that.”