Reframing M&A potential in the Agrochemicals Industry
“All that glitter isn’t gold. It’s glyphosate.”
In 2018, this chemical component generated billions of dollars in revenues for Monsanto and other companies, aiming at helping farmers in food production. In 2018, the agrichemicals industry also outshined gold twice in terms of returns.
This industry is an aggressive, growth-seeking industry. Fostered by environmental, demographic, regulation, technologic, and innovation pressures, M&A is a leveraging tool to capture that growth by acquiring targets, making VJs, or building partnerships. However, analysts estimate that following the mega-merger of Bayer AG and Monsanto1, 60% of market sales will be owned by only three firms. Is consolidation still a valid option for agrichemicals firms? Where are growth strategies heading in 2018?
A highly pressurised industry
The agriculture-chemicals industry is responsible for the production of chemical products used in agriculture (pesticides, fungicides, but also biofuels). In 2016, the global market was worth 215b USD in and is projected to reach 308.92b USD by 2025, growing at a CAGR of 4.1% from 2017 to 2025. This industry moves alongside the agribusiness, representing 5 trillion USD in 2016. It is an essential apparatus for food and fuel production worldwide, making it the intersection of both economic, environmental, social, and technologic issues.
Although sizable productivity improvements over the past 50 years have enabled an abundant food supply in many parts of the world, feeding the global population has reemerged as a critical issue. The world population is growing at a rate of 80 million additional people per year and analysts forecast a 9-billion world population by 2050. Moreover, the rise of middle-classnotably in emerging countries is putting pressure on water- and grain- intensive materials such as beef meat.
Environment also plays a key role in challenging the agri-business. With scarce land available (12% of land surface), less water available (3% of the Earth’s water is fresh, and less than a third of that is economically accessible for human use in an environmentally responsible way), and climate risk (widespread global temperature increase, change in precipitation patterns in various regions, and extreme weather events), there is a higher need of inputs to increase crop productivity. Moreover, food and energy production are competing, as corn and sugar are increasingly important for both. Such resource scarcity could lead to political unrest on a large scale if left unaddressed.
Authorities (both governmental and non-governmental) influence regulations and public opinion about the use of agrichemical’s firms products, and in recent years, there have been a high inclination for environmental-friendly products as debates about health and environmental concerns have emerged.
This industry is dominated by key players (see chart 1), among which lies the latest-merged Bayer-Monsanto. Or rather, the further-delayed-under-consideration-biggest-all-cash deal ever of Bayer AG-Monsanto. Why such a delay? Antitrust regulation, first. Health concerns, second. And political issues, third, such as the tradeoff between the global food challenge and environmental/social issues regarding modified crops. I’ll have you know, this is an important industry.
Bayer-Monsanto is the third of three mega-mergers in the agrichemical and seed industry. The other two deals, the merger of Dow and DuPont and the purchase of Syngenta by ChemChina, were approved last year after both companies promised to sell substantial parts of their business to allay concerns that each of those deals would cut competition. Each of these 3 deals were valued for more than $100b.
A long period of segment-specific consolidation
The consolidation of the industry started in the 1990s, when firms were operating with highly-vertical integration, having their own production lines at each entity of the supply chain, all aimed to produce a final product.
Consolidation strategies act upon two driving forces of 1990s:
- Threats arousing from globalization, margin pressure, commoditization of chemicals, or competition to innovate
- Opportunities arousing from the oil & gas industry, where firms also restructured by spinning-off their chemical branches. In 2004, BP spun-off Innovene to INEOS (one of the industry’s leaders today), while Total created its new spin-off Archema.
It is noteworthy to highlight that consolidation in 1990s only affected developed countries’ agrichemical firms. Why? M&A was a tool to gain growth and reemerge in a maturing market.
Goals through M&A moves were then to:
- Reshape business portfolio
- Enter new markets or regions
- Focus on core competencies
In emerging countries though, Middle East, China, and India were ground of rising chemical companies during the 2000s, fostered by an increasing demand (expanding economies). However, these multiple small firms were still in the first stage of their development, so consolidation didn’t affect these markets yet.
Over the next 10 years, M&A strategies in developed countries slowly moved from expansion-seeking to a strategy of business realignment. This strategy was risky. The bigger the player, the higher the risk of focusing on a niche as R&D investments are substantial in the agrichemicals industry. However, most key players decided to go risky. For example, Monsanto doubled its investments in R&D from 2005 to 2010 (from $600m to $1.2m). This focus on core competencies was unequal depending on the sub-activity: in crop protections, M&A has been so intense that there are scarce opportunities now — antitrust regulations would likely play a factor in any remaining deals across major agrochemicals companies. On the other hand, biotech startups is still a relative free-of-consolidation business. Niche over niche, consolidation is an-going process in the agrichemicals industry. When mergers and acquisitions are not relevant anymore, strategic partnerships take the reins.
End of 2014, the chemicals landscape was dominated by integrated key players (Syngenta, Bayer, BASF). In the crop protection business, top three firms owned 60% of the market share (Syngenta, Bayer, Monsanto). Is consolidation still relevant in this industry dominated by key players and where each strategic move requires consequent investments?
There is still room to grow
Today, big agrichemical players are well-capitalized and are aggressively seeking growth in an over-competitive market. What are the threats? What are the opportunities?
The economic environment has appeared positive lately: belief in recovery and world growth, positive forecast for equities markets notably in the Eurozone, high valuations, etc. The economic framework looks like a fruitful ground for mergers and acquisitions. But in the Eurozone or US, the industry appears too consolidated already to give room to grow. The delayed closure of Monsanto’s acquisition by Bayer AG reflects how difficult it is today to consolidate in the EU, given the anti-trust regulations.
Now, let’s take a look abroad. We previously referred to the emerging markets as an unconsolidated industry. However, this is no longer the case. When looking at China, the government is pushing forward the consolidation of their own national industry, by acquiring Chinese targets. New national champions able to compete on a global scale are quickly developing (ChemChina, Nutrichem Comp…). Is this an opportunity or a threat? It’s now up to world players to adapt their strategies.
What are the new goals of M&A?
- Gain market size in emerging markets where local players are leaders
- Attract new targets before EM players snap them up
- Further reshape their portfolio
Because developed countries’ agrichemical firms are already consolidated in their regions and are often specialized in some niches, they need to develop a more aggressive strategy to gain ground where they’re not: in other words, high-technology, specialized services, and emerging markets.
Let’s crack down some noteworthy strategic trends in the agrichemicals business, and to what extent M&A can adapt its services to each:
a) Feedstock access
This refers to upstream players that aim at ensuring access to raw materials in terms of volume, thus ensuring costs and favorable market positions in the long-run. This requires M&A teams and acquirers to quickly apply the current business model to the target and leverage classic cost synergies during the post-merger integration phase.
b) Absolute or relative scale
Large integrated players will look for absolute scale while downstream firms or niche firms seek relative scale. For example, a downstream firm aims to at gain close relationships with clients rather than increasing its R&D in every segment it has.
c) Cross-border deals: a one-way move?
EMs represent an outstanding opportunity for US and EU agrochemical firms. Cross-border deals are still scarce; national champions in EMs are attractive targets as they have room to go in terms of growth, and EMs economies are pushing forward demand for agrichemicals.
The problem is it’s often impossible, or at least very difficult, to acquire EM Potential targets. They are often part of large conglomerates, or they are state-owned (fully or partially), making them either unavailable or largely unattractive.
The government in some countries, like China, poses an additional hurdle through restrictions on the share of local companies that foreigners are allowed to own.
Now, let’s go to the west. To what extent is it strategic for EM agrichemical companies to seek target in Europe or the US? First, share technology and expertise between respective business. Second, establish a foothold in established Western markets. Third, open the gate for driving EMs export business. And the truth is: these takeovers are more likely to happen because of a more flexible regulation and market and will play an increasing role in the future (e.g PetroChina’s venture with INEOS in 2011, to form a partnership in new trading and refining joint ventures related to the refining operations in Scotland and France).
d) Strategic alliances and partnerships:
Partnerships and joint ventures are an increasingly important means for chemicals players to reshape their activity portfolio, especially in Asia and the Middle East. One example is Sabic and Sinopec’s 2009 established joint venture SSTPC in Tianjin, China, valued at 2.7 billion USD with a capacity of 3.2 million tons of chemicals. In Europe too, partnerships are taking the rein of takeovers, as some businesses are already fully- consolidated.
If alliances are about similar or complementary activities, M&A teams must be able to identify self-sufficient and viable businesses that are adjacent to acquirers’ current positioning. A deep understanding of those businesses and differentiating capabilities is required.
But success factors are different depending on the firm’s position in the value chain: the more customer-centric it is (i.e. the more downstream it is), the more crucial are innovation, sales, marketing, and management. On the other hand, an upstream firm seeking feedstock access will set its deal’s success on assets, scale, and technologies.
M&A teams are crucial in sharpening the strategy depending on the value chain’s position and the tricky regulatory landscape, especially for cross-border deals.
Consolidation still has room to go. Emerging markets are a key theme for M&A strategies as competitors in other regions are maturing and regulation is preventing them to consolidate further. On the other hand, established regions also have their own driving forces. Industry segments, no matter their level of consolidation, have high technological opportunities (agtech, biotech, etc.) as it is a competitive advantage of these established regions. It will push forward the segmentation of the agrichemicals industry and contribute to the growth of this discrete, yet striking, industry.
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