‘Chain reaction’, The Economist 27th May 2017, p55
After a decade without any big deals, since 2015 three mega-mergers, collectively worth around $240bn, have been proposed. If all three proceed, as now seems likely, four companies will produce 70% of the world’s pesticides instead of six today.
The first mega-merger, announced in December 2015, was between Dow Chemical and DuPont, the world’s fourth and fifth most valuable chemicals firms, in a $130bn deal. It was the largest-ever tie-up in the industry, and triggered other liaisons. Within a year Bayer, a German agrichemicals giant, agreed to merge with Monsanto, an American seedmaker, in a deal worth $66bn; and ChemChina, a Chinese giant, offered $43bn in cash for Syngenta, a Swiss biotech firm. ChemChina plans to merge with a local rival, Sinochem, to create a firm with revenues of $100bn or so.
Dealmaking has now spread from agrichemicals to the rest of the industry, particularly to “specialty” firms that make chemicals for niche uses. On May 22nd Clariant and Huntsman, whose products include additives for pesticides, agreed a $14bn merger of equals. Bigger still is the latest bid by PPG of America, a specialty maker of paints and coatings, for AkzoNobel of the Netherlands, a rival which owns Dulux paint. On May 24th, Praxair and Linde, two industrial-gas firms, agreed the terms of a merger of equals worth $70bn.
The main impetus has been a dramatic slowdown in the growth of demand across all types of chemicals, says P.J. Juvekar of Citigroup, a bank. In the 2000s sales expanded at a rate of 6-7% a year, but last year the industry grew by just 2%, with demand from China very weak. Executives are hoping to use scale to cut costs.
The soaring cost of developing and testing new chemicals is another factor, says Kurt Bock, CEO of BASF, a German chemicals giant. The average cost of developing a new active substance has shot up from $150m in 1995 to over $500m in Europe today; most of that goes on testing for safety. Over the same period, the number of potential compounds that have to be synthesised and tested for each new substance, in case they are harmful, has risen from 50,000 to over 140,000, a process that can take as long as a decade. To account for longer and more costly development cycles, firms need enough financial heft to be able to have more projects on the go.
More stringent regulation throughout the EU has reduced the number of pesticides farmers are permitted to use, from nearly 1,000 in the early 1990s to around 400 today, notes Robert de Graeff of the European Landowners’ Organisation, a trade group. If greater scale means that firms feel able to invest the larger sums of money needed to develop new products, his members would approve.
But farmers are also fearful. They don’t want to become overdependent on a set of seeds and chemicals made by a single firm. All three of the mega-mergers are between one firm focused on seeds and another on agrichemicals. Many farmers are worried this will mean they will be forced to use pesticides made by the same firm that produces the seeds they buy. Roger Johnson, president of America’s National Farmers Union, says that his members don’t like any of the mergers. More consolidation may also mean that chemical firms can charge higher prices, he fears, and face less pressure to develop new products.
‘A seedy business’, The Economist 21st May 2016, p55 (abridged)
DuPont and Dow Chemical, two chemicals firms with a combined 300-odd years under their belts agreed to merge in December 2015 in a $130 billion deal which seemed to be a prime example of American managers’ ruthless pursuit of shareholder value and dedication to building monopoly positions. The companies said they would combine and then split into three new firms, focused on agriculture, speciality products (used, for example, in electronics), and materials (used in plastics). Huge cost cuts were planned, the aim being the three new firms would gain market share and be able to raise prices.
Dow-DuPont is part of global consolidation in the agricultural seeds and chemicals industry. In February ChemChina, a state-owned Chinese firm that has been on a buying spree, agreed to pay $43 billion for Syngenta, a big Swiss firm that specialises in selling chemicals to farmers. This week Monsanto, an American seeds firm valued at $42 billion, confirmed that it had received an unsolicited takeover approach from Bayer, a pharmaceuticals and chemicals concern that is one of Germany’s biggest firms by market value. Monsanto has gone from hunter to hunted, having tried and failed to buy Syngenta a year ago. Overall, the deal-making could exceed $200 billion: it is the stuff of investment bankers’ dreams.
Three trends explain the surge in activity. First, a slump in sales: the agricultural-product industry’s top line, growing at 2% in 2014, fell by 10% in 2015. With crop prices low, farmers are spending less. Second, bosses think that selling bundles of products to farmers will be more profitable in the long run. Monsanto talks of having a footprint of millions of acres around the world upon which seeds, bug-killers and nutrients can be used, helped by better mapping and data-crunching. The third trend is specific to Syngenta: China’s government wants to modernise its farms and to own the intellectual property involved, for example seed patents.
Merger waves have struck many other industries—think of oil in the 1990s or steel in the early 2000s. Often the grand themes used to justify deals make some sense, but the numbers don’t add up. The present binge already looks alarming. ChemChina will borrow a cool $35 billion to buy Syngenta which, based on its 2015 profits, will make its new Chinese owner a hopeless 3% return on capital. Were Bayer to try to buy Monsanto with cash, the combined firm would have net debt of a queasy four times its gross operating profits, and the purchase would generate a roughly 6% return on capital, using 2015 figures. The lavish cost savings promised by Dow and DuPont have failed to excite, with both firms’ shares trading roughly in line with the stockmarket since the deal was launched.
One explanation is that investors worry that antitrust regulators will block the all-American combination, or impose tough conditions on it. Competition concerns could yet scupper the entire wave of dealmaking. The ChemChina deal, meanwhile, could attract attention from spooks. Europe has been relaxed about Chinese takeovers. Last year ChemChina bought Pirelli, a fading Italian industrial champion. But Syngenta makes 27% of its sales in North America, so its purchase will be vetted in America by a national-security committee known as CFIUS. This has a track record of protectionist behaviour towards Chinese firms. Syngenta’s shares trade at a hefty discount to the Chinese offer, because of fears that the deal may be blocked.
‘Hazard signs’, The Economist 17th November 2018, p56 (abridged)
The past two decades increasingly look like a golden era. Between 2000 and 2015, listed chemical firms produced total returns to shareholders of 300%, three times higher than firms across all sectors. Surging consumption in China helped demand for their products rise faster than GDP growth. Several rounds of mergers have reduced price competition in the industry, particularly in agrichemicals. Falling trade barriers let firms move production to low-cost places.
These trends have reversed, notes Florian Budde of McKinsey, a consultancy. Demand from China is likely to slow, because consumers are buying fancier goods, such as posher cars, as well as services, both of which require less plastic. State-owned Chinese enterprises are muscling onto the global stage, encouraged by the government’s emphasis on self-sufficiency in chemicals, which exerts downward pressure on prices. Last year ChemChina bought Syngenta, a Swiss agrichemicals firm, for $43bn, for example. It is now grabbing market share from the Western giants in Africa and Latin America. Trade wars between America and China will hit the industry’s global supply chains, lifting costs.
But the sense that something deeper is wrong also troubles the industry. For the first time since the advent of industrial chemicals in the 19th century, bosses are worried about the long-term prospects of some of their best-selling wares, from the pesticides farmers spray on crops to the plastics used in millions of products.
Regulators are not the only source of concern. Consumers in many places are showing themselves ready to pay more for food involving little or no use of pesticides. Farmers in turn are switching to “precision” methods, entailing more targeted use of chemicals or robots to do weeding. Bayer executives fear this shift could hit demand for its pesticides by as much as 20-30% over the next decade, says Markus Mayer, an analyst at Baader Bank, an investment bank near Munich.
Precision farming “will change how we think about farming”, says Sam Watson Jones of the Small Robot Company, a British startup. It is developing three small autonomous robots—called Tom, Dick and Harry—which will only feed and spray the specific plants that need it rather than dusting an entire field with chemicals from a tractor or plane. He claims that his company’s system will cut chemical use, and carbon emissions, by up to 95%. [Such] digitisation has scope to answer consumers’ concerns about indiscriminate use of chemicals, and also to generate a new stream of profits. Many firms are racing to offer digital-farming tools, which can provide advice to farmers using big data, satellite pictures and weather information. The market leader in this field in America is Monsanto-Bayer’s FieldView platform, produced by a subsidiary called Climate; in Europe it is BASF’s Xarvio app. Some of Bayer’s executives think that, however much grief Roundup causes, its purchase of Monsanto was worthwhile just to get its hands on Climate’s technology, which farmers already pay to use on 60m acres of fields in America. When regulation of glyphosate hits in Europe, Bayer can potentially replace revenues from chemicals with revenues from data, says Mike Stern, the company’s head of digital farming.’