Agriculture mega-mergers to create new industry juggernauts
While the stock exchanges of New York, Shanghai and Frankfurt may seem like a distant concern, even the smallest farmer in New Zealand should take an interest in a proposed series of mega-mergers that have the potential to reshape the global landscape of farming and food production.
After more than a decade without any major transactions, the industry is being shaken up by a series of merger and takeover announcements, collectively worth US$240bn. These will see six of the largest agrichemical and seed companies consolidate down to three entities, which will jointly control an estimated 70% of the global agrichemical market and 60% of the global seed market.
The first of these transactions to be announced was the US$130bn merger of Dow Chemical and DuPont, which was followed within a year by the announcement of the US$66bn merger between Bayer and Monsanto and ChemChina’s US$43bn acquisition of Syngenta. While initially the market was sceptical that these deals would complete due to perceived competition issues, recent approvals from US and European regulators means all three transactions are now likely to be successfully executed.
From an analyst’s perspective, the news of these mergers is not a surprise. There has been a significant slow down in growth across the agrichemical sector, which has seen revenue growth decrease from a reported 6-7% per annum in the previous decade to 2% in 2016. At the same time, the average cost of developing and testing new chemicals has risen dramatically (for example, the average cost in Europe reportedly increased from US$150m in 1995 to US$500m in 2017). Importantly, the agrichemical and seed industry lends itself well to consolidation, with significant synergies and efficiencies of scale up for grabs if the companies can execute the merger well.
Despite financial analysts eventually expecting this consolidation, the concurrent nature of the mergers amongst these six companies to create three industry juggernauts has raised concerns amongst farming, consumer and environmental advocates. While the executives of the respective companies all point out that the deals will allow the firms to combine expertise and generate efficiencies to deliver cost savings and innovation, farming and consumer groups have raised concerns that the decline in competition may ultimately result in a greater ability to increase the prices of agrichemicals and seeds. Of particular concern is that all three transactions bring together an agrichemical company and a seed company so farmers may eventually be forced to buy both seeds and pesticides from the same company, creating an effective barrier to changing suppliers and further eroding competition.
Another concern for farmers is that this initial wave of mega-mergers has created a ripple of smaller specialist transactions in their wake. Clariant and Huntsman Corporation, whose products include specialist additives for pesticides, recently agreed to a $14bn merger and, while ultimately rejected, PPG Industries recently proposed the acquisition of AkzoNobel (which ultimately owns Yates). ChemChina has also proposed a merger with Sinochem Group, which together with the acquisition of Syngenta would create a significant new player in the agrichemical sector.
Despite these industry concerns it seems relatively certain that these transactions will all be approved by regulators, although the final forms of the deals are yet to be seen. The companies have already signalled a willingness to restructure operations in order to secure approval and this will hopefully alleviate some of the competition concerns. For example, Bayer has already agreed to sell its Liberty crop protection brand in order to secure regulator consent to complete the Monsanto acquisition.
From a New Zealand perspective, it is difficult to forecast the impact with any certainty at this stage, but keeping an eye on how events unfold will be of keen interest to all participants in the farming sector.