Each individual deal seems possible, but can regulators approve them all?
EXCERPT: Generally speaking the larger a deal, the higher the failure rate. According to Bloomberg BNA, megadeals with a value of greater than $10B had a failure risk of 27.5%, more than twice as high as the next tier. If we extrapolate this figure, one of the three mergers in progress is likely to fail.
Dow And DuPont, Bayer and Monsanto, or Syngenta – which will succeed?
Seeking Alpha, 17 Nov 2016
* The global crop protection and seed industry is in a transition.
* ChemChina buys Syngenta, Dow Chemical merges with DuPont, and Monsanto is acquired by Bayer.
* Each individual deal seems possible, but can regulators approve them all?
Five of the six leading global crop protection and seed companies are currently involved in megamergers. Only BASF is standing at the sidelines, likely waiting to pick up attractive businesses that will unavoidably come on sale, once regulators have determined where the dominance of the newly formed entities will become too much.
It all started last year, when Monsanto intended to acquire Syngenta, but without success. The first deal which was officially agreed upon was the merger of equals between Dow Chemical and DuPont. It will lead to the formation of three new individual entities, one of them being the combination of Dow Agrosciences (“DAS”), DuPont Crop Protection, and Pioneer, DuPont's seed business.
Shortly after the Dow/DuPont deal was announced, ChemChina made a public offer for Syngenta, and finally, the German Bayer AG surprised markets with its intention to buy Monsanto. After some tough negotiations, both companies agreed on a price, and should the deal go through, it will be the largest takeover of a German company ever.
Since the last wave of M&A in the late nineties, the industry is already highly consolidated. The six largest agrochemical companies represent around 75% of the global sales, and a similar picture materializes for seeds where the top six can accumulate approximately 65% of the global market share.
With the three looming deals, more than 60% of the current agrochemical market and close to 60% of the seed industry are currently involved in merger discussions. This is a situation which I believe has been unheard of…
No question, if all mergers go through, the agrochemical and seed industry will be different. Although none of the three leaders will have a globally dominating position, it sounds as if such a development cannot be in the interest of farmers worldwide. Hence, regulators will have a very close look at each of the deals.
On paper, all three combinations look like a good match, and despite their size and market shares, there is surprisingly little overlap in each case. I am not an expert in anti-trust law, but I think that each individual deal could get approval (after some concessions to regulators) - if it was the only one. However, it is not a single merger/takeover, but three of them, and this fact might in the end reduce the chances of success for all of them.
ChemChina and Syngenta
The takeover of Syngenta would be the largest acquisition of ChemChina, a state-owned company and the largest enterprise in China's chemical industry. Since 2005, the company has acquired various mid-size chemical businesses, and last year announced the largest takeover in its history, the acquisition of a majority stake in Italian tire manufacturer Pirelli for $8 billion in March 2015.
The acquisition of Syngenta would be the second major investment in the agrochemical industry after ChemChina took over the majority stake in the Israeli company Maktheshim Agan Industries (MAI) in 2011 and gained full control only recently after the remaining shareholders sold their stake to ChemChina. MAI is the world's largest manufacturer of generic crop protection products and now operates under the name Adama Agricultural Solutions Ltd.
Compared to the other two, the Syngenta acquisition should lead to the fewest regulatory concerns. Adama is not a major player and reported agrochemical revenue of $3.1B in 2015. The company has a strong international presence and a broad portfolio, but a relatively small market share in all regions. As a generic manufacturer it has no unique products and faces strong competition. With respect to their portfolios, there is some overlap between Adama and Syngenta Crop Protection. Beyond Adama, ChemChina controls several smaller local pesticide companies which are not active outside China.
A major worry for ChemChina have been concerns whether the acquisition would get the approval of the CFIUS, the Committee on Foreign Investment in the US, but green light was obtained in August. The next big hurdle is now the approval of the European Commission.
Dow Chemical and DuPont
Surprisingly, there is also little overlap between Dow's and DuPont's ag businesses, and in fact both complement each other. DAS has the bigger crop protection business whereas DuPont is leading in seeds. Pioneer is the second largest seed company worldwide, only surpassed by Monsanto. DAS has bought several smaller seed companies over the years, and like any other major player it generates revenue through trait licensing.
Not surprisingly, both DAS and DuPont are quite strong in the US, hence regulators will look very closely at the merger. The combined share on the US seed market might cause the biggest worries, whereas there is limited overlap in the crop protection portfolios.
Geographically, the merger will not increase the footprint of the two companies significantly. DuPont and DAS are both strong in the US, well represented in Latin America and rather weak in Europe and Asia.
Bayer and Monsanto
After some tough negotiations, Monsanto eventually had to give up, and it was agreed that Bayer will buy the company for $128 per share or a total consideration of $66B including debt.
On paper, a combination of Bayer Cropscience and Monsanto looks even better than Dow Agrosciences and DuPont joining forces. On one side, there is the undisputed market leader in seeds and traits, on the other side one of the two leading agrochemical businesses. Regionally, Monsanto is very strong in the Americas whereas Bayer has a strong market presence in Europe.
Bayer Cropscience and Monsanto would become the new market leader, both in crop protection and in seeds. There is no question that regulators will look very closely, and other groups will openly oppose the deal. Farmers have already raised concerns, joined by politicians and the public. The fact that Monsanto is one of the main targets for environmental groups and NGOs surely does not help either, particularly in Germany and in Europe.
When looking at the facts, again there is surprisingly small overlap in the combined businesses. One of the primary concerns could be the US cotton seed market, one of the few highlights in Bayer Cropscience's seed portfolio. Vegetable seeds in Europe are a second area where the businesses overlap. Another issue could become the "Liberty Link" herbicide tolerance trait which was developed by Bayer and which complements resistance to glyphosate and other herbicides.
In the agrochemical portfolio where Monsanto does not have much more to offer than the burndown herbicide glyphosate ("Roundup"), regulators should find fewer reasons to complain.
The Chances for Success
To start with the most obvious conclusion, whatever the outcome of the individual mergers is going to be, there will be delays, and none of the deals will close within the envisioned deadline. Particularly, approval in the European Union will become a lengthy process.
Dow and DuPont were the first to notify the European Commission on June 22. Not surprisingly, the Commission did not accept commitments which were suggested by Dow and DuPont to address preliminary concerns, and an in-depth investigation ("Phase II") was started on August 11. The Commission has 90 working days to complete a Phase II review, which meant until December 20 in the case of DowDuPont.
The review was then halted after regulators requested additional information, delaying the process first until February and then for a second time until March.
It seems that ChemChina and Syngenta will follow a similar path. The European Commission did not approve the acquisition after the first phase of the review process. The current 90-day period in Phase II officially ends on March 15. Nobody knows whether this deadline will be met or if regulators come up with additional questions, only time will tell. ChemChina's original intention was to close the deal already in 2016.
In any case, there is less overlap between Syngenta and Adama, hence the likeliness for approval is higher, at least in my point of view.
Bayer and Monsanto have not notified the European Union yet, but they will very likely be confronted with the same issues. There will be no quick approval, and the review will go from Phase I to Phase II, and then likely be halted as the Commission will also request additional information. In comparison to Dow and DuPont, Bayer will be confronted with even more scrutiny, because the European market share of a combined Dow/DuPont is still comparatively small against Bayer's and Monsanto's.
The Stock Market as an Indicator
The probability for the deals to succeed, at least in Mr. Market's point of view, can be easily seen in the spread between the offer and current share price. At least for Monsanto and Syngenta this is quite obvious, in contrast to the Dow/DuPont deal which is more complex and does not only involve agrochemicals and seeds.
ChemChina offers $465 plus a special dividend for one ordinary Syngenta share, roughly $94 per ADS. Trading at $76, there is now a 23% premium if the deal goes through. In Monsanto's case, the skepticism is even higher. Bayer offers $128, all in cash, but Monsanto shares can be bought for only $100, a gap of 28%. It is also worth mentioning that the spreads have increased in the recent weeks which indicates that investors became more pessimistic.
Generally speaking the larger a deal, the higher the failure rate. According to Bloomberg BNA, megadeals with a value of greater than $10B had a failure risk of 27.5%, more than twice as high as the next tier. If we extrapolate this figure, one of the three mergers in progress is likely to fail.
The peculiarity of the three pending megamergers is that on one side the portfolios do not overlap that much, so that regulatory approval sounds possible. On the other side, if all three mergers go through, it will lead to a tremendous concentration of market share in only three hands.
The outcome is very difficult to predict, and I assume that anything is possible. Nevertheless, I have my doubts that all mergers will ultimately go through. This includes the possibility that a deal will not be officially stopped by a regulatory body, but that it might be delayed over and over again until one of the parties finally gives up.
To conclude, the Syngenta takeover has the highest probability of success, at least in my opinion, because it will bring the least consolidation and concentration. In fact, it is less of a merger, but more a change of ownership since ChemChina's existing activities in the industry are in the end negligible and dispensable.
I guess the only safe bet is that various investment bankers and law firms will earn tons of money, but which of the deals will ultimately go through is impossible to predict. Each of the three megamergers is under scrutiny from several sides. This includes farmers who will in the end will be mostly affected by the deals, the public and concerned NGOs, politicians and ultimately regulatory bodies in different regions which will have the final word.
Disclaimer: Opinions expressed herein by the author are not an investment recommendation, any material in this article should be considered general information, and not relied on as a formal investment recommendation. Before making any investment decisions, investors should also use other sources of information, draw their own conclusions, and consider seeking advice from a broker or financial advisor.
Disclosure: I am/we are long SYT, BFFAF.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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