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DuPont (NYSE: DD) is a hot commodity these days.
The chemical giant is planning to merge with Dow Chemical (NYSE: DOW), but could now find itself in a buyout battle.
Germany-based BASF SE (OTC: BASFY) is said to be putting together a bid for DuPont. BASF is a bit bigger than both DuPont and Dow, with a market cap of more than $60 billion. It’s the third-largest producer of pesticides and insecticides.
This potential overture from BASF comes despite the fact that it’s been the big laggard of the industry. Shares are down 25% over the last year.
Meanwhile, DuPont stock has fallen 15% from when the Dow merger was announced, making the stock more enticing for investors and potential bidders. The other perk is that shareholders are getting paid a 2.35% dividend yield while they wait.
BASF is certainly feeling the pressure as well, with the entire industry consolidating around it. Not only is there the potential Dow-DuPont merger, but Monsanto (NYSE: MON) tried to buy Syngenta (NYSE: SYT) before Syngenta decided to sell itself to ChemChina.
The Grand Plan
The Dow-DuPont merger is expected to be completed in the second half of this year. Less than two years later it would then split into three entities: a material science company, an agriculture company and a specialty products company.
The merger would be the largest deal ever in the chemical industry and would create the world’s largest agriculture business and second-largest chemical company, behind just BASF.
The move would lead to more stability, market share gains and cost savings for the new company, to be called DowDuPont. DuPont shareholders will own 50% of the new company that is expected to have a value of roughly $130 billion. This puts DuPont’s buyout price at $75 a share, meaning BASF would likely have to beat that offer.
Chemical Industry Getting Interesting
In truth, DuPont is much more than a chemicals company. Its most exciting business is in the agricultural and nutrition business. In particular, the agribusiness makes up close to 40% of DuPont’s operating profits. This type of agriculture exposure is one of the reasons that BASF is interested in the company. As well, BASF has no agricultural business.
The market for seeds and crop chemicals should do well as the urbanization and growth of emerging markets drive the demand for more food and protein.
DuPont is the second-largest seed company, behind just Monsanto. However, DuPont has been growing its seed portfolio nicely, with its corn seeds now on par with Monsanto. Some notable advantages for DuPont over Monsanto and other seed competitors is the direct-selling model it uses, which cuts out the middle man.
The beauty of agriculture is that the amount of land available is finite and the number of acres available for crop production is shrinking as the world population continues to grow. Thus, farmers will need to focus on crop production and efficiency.
Now, the one hesitation for investors is that DuPont’s dividend yield is just 2.35%. Meanwhile, Dow is paying a 3.6% yield and BASF offers the best yield of the three, coming in at 4.3%. However, it isn’t Dow or BASF that is at the center of the buyout battle.
The seed and chemical industry is poised to get a lot smaller, which will be a boom for shareholders. Right now, DuPont is the most interesting play in this industry.
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