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M&A activity in the agriculture chemicals and seeds sector continues to heat up. Last year, DuPont (NYSE: DD) and Dow Chemical (NYSE: DOW) agreed to join their ag operations as part of an overall combination of the two firms.
The latest deal in the sector involves a $43.8 billion all-cash offer for Syngenta (NYSE: SYT) by ChemChina. Syngenta is the world’s largest agrichemicals company and a major player in the seed business. It fought off a takeover attempt last year by rival Monsanto (NYSE: MON).
ChemChina – officially named China National Chemical Corp. – is a Chinese chemicals corporation that has been snapping up overseas assets. Last year the company bought Italian tire company Pirelli.
If the Syngenta deal is consummated, it will create an agricultural powerhouse. It will also mark the biggest ever overseas purchase by a Chinese company.
But this transaction is more than a mere high-water mark for Chinese corporate activity. It marks a vast acceleration of the shake-up in the global agriculture and chemicals industry.
It’s Mainly About China
First and foremost, this takeover by ChemChina was a direct response to the DuPont-Dow deal. The combined DuPont-Dow would have a 25% share of the worldwide agrochemicals market. So ChemChina wants to protect its market share, particularly in China.
The DuPont-Dow merger also threatened to throw a wrench into one of the Chinese government’s key goals: to become more self-sufficient in food supplies. That’s especially important if you’re the globe’s biggest agricultural market.
The country currently is highly reliant on foreign companies for seeds in particular. China is currently the second-biggest seed market on the planet. This deal will make ChemChina the world’s largest seed company and it will cement its place as the biggest agrochemicals provider in China.
During the next five years, China hopes to bring its agricultural sector into the 21st century. China’s agricultural yields are more than 40% lower than in the U.S. A big part of that modernization will involve use of Syngenta’s portfolio of genetically modified seeds.
The use of Syngenta’s seeds will be ironic, because China in the past has banned the import of GM crops, including crops grown using Syngenta’s seeds. But China has little choice if it is to feed its 1.5 billion people. It will relax its restrictions on the use of genetically modified seeds.
Most likely, China will start with GM corn. This will be used primarily for animal feed. It may take a lot longer for the Chinese public to accept genetically modified rice.
The Other Effects
The deal is more than just about China. It is also intended to crimp the plans of ChemChina’s rivals in the $100 billion agrochemicals and seeds sector.
Syngenta had $13 billion in sales last year. Now it has a state-backed Chinese company behind it.
That puts added pressure on Monsanto, which had $15 billion in sales last year. It wanted Syngenta’s agrochemicals portfolio.
And then there are BASF SE (OTC: BASFY) and Bayer AG (OTC: BAYRY). Their agriculture segments had $6 billion and $11 billion in sales last year, respectively. I strongly doubt either wants to partner with Monsanto. But a merger of their two ag businesses may be possible. That leaves Monsanto the bridesmaid. It may have to be content with just buying up a bunch of small players in the sector.
There is one piece of good news for the other players in the seed business in this proposed deal.
The Committee on Foreign Investment in the United States must sign off on the ChemChina-Syngenta combination. And you know the U.S. loves to stick it to China when it can, and vice versa.
I do expect eventual approval. But in return, the committee may ask China to open its agriculture market further to GM seeds from other providers.
This will help. But the remaining actors in the sector – Monsanto, Bayer and BASF – need to find dance partners. And soon.
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