Making Sense of Mergers
9 June 2015 Syngenta might have rejected Monsanto’s bid to buy the company, but the industry is still primed for consolidation. The deals are huge. Platform Specialty Group spends billions to acquire Arysta, Chemtura and Agriphar.
In 2014, merger and acquisition activity in the agrochemical market in general and the crop protection sector in particular generated a great deal of interest. It was a busy year and experts believe that 2015 could be just as interesting.
According to Pam Schlosser, U.S. Chemicals Leader for Pricewaterhouse
Coopers (PwC), about half the deals in 2014 were megadeals, more than $1 billion (including all of the chemicals industry, not just agrochemicals). Those transactions were generally split between U.S. and Asia.
“We saw a significant amount of consolidation in China, primarily driven by Chinese government’s focus to bring about these national type companies,” Schlosser says. “Significant Chinese players are trying to bring these companies together to capture synergies as well as create more nationally
branded companies.
“Quite a bit of the Chinese deals were fertilizer and agchem sectors. We see a lot more crop protection chemicals coming out of China. We’re seeing the regional players consolidating and really taking advantages of cost savings and creating even bigger powerhouses.”
“Chemicals players have trended toward global scale and consolidation, and a laser focus on efficiencies is required to compete in what today is a much more global supply chain,” says Pranav Garg, Managing Director and co-head at HighQuest Partners.
HighQuest Partners is a specialist management consulting and M&A advisory firm dedicated to the global food & agribusiness sector.
Adjusting the Portfolio
Achieving global scale is just one reason companies engage in M&A activity. “The bigger underlying theme is a move toward more focused specialty chemical portfolios, which are higher margin, in contrast with commoditized parts of the portfolio such as glyphosate,” Garg says. “The potential is for overall achieving higher returns and capital and, over time, higher shareholder returns.”
According to Garg, higher returns is one reasons behind Platform’s recent activity.
“This is a trend that is global; it is not limited to Platform. The industry is also embracing a trend where companies are separating their portfolios between the commodity side and the specialty side, in an attempt to capture greater value,” he says.
FMC recently desegregated its portfolio between ag solutions and the minerals. Dow, Bayer, BASF, Nufarm, Sumitomo have also made similar moves.
Other M&A triggers include the desire to build out product portfolios and gain access to efficient supply chains. Garg expects to see some acquisitions for product portfolios. “We might see some acquisitions to gain access to better, more efficient supply chains,” he says.
Where in the World
The United States and Asia might be responsible for the majority of M&A activity, but that doesn’t mean the rest of the world is being neglected. Companies in emerging markets make for intriguing targets.
“Each one of the markets has its own degree of complexity,” Garg says. “There are many markets in Latin America that could be interesting. Brazil is the big one. That’s driven quite simply by Brazil being recognized as a phenomenal bread basket to the world, today, and in the time to come.”
“Brazil has one of the most difficult and complex approval regimes for an active ingredient or a formulated product, in order to be able to sell it to the market. That creates an additional trigger for acquisition in those markets. The goal is to bypass these difficult hurdles to otherwise get into the market. There are other markets that are much easier to sell into. It’s a country-by-country, market-by-market thing.”
“A developing belief is, when you’re talking about emerging markets, it’s the 80/50 rule,” Schlosser says. A customer is willing to accept 80% efficacy, but wants to pay only 50% of the price.
“For example, if you’re going to compete in an emerging market, you need to know what those drivers are to that customer,” Schlosser says. “It might be they will accept less functionality, but clearly they want it for a fraction of the price. You must adjust that mindset when you’re working within emerging markets. We think that has a real significant play from the ag perspective, specifically on the crop protection side.”
In the Future
According to a recent release from PwC, M&A endeavors during the first quarter of 2015 was just as active as the same period last year.
There were 36 chemical transactions (valued at $50 million or more) totaling $15 billion in Q1 2015 compared with 35 deal amounting to $14.5 billion during the same period last year.
“Clearly, the fundamentals for continued deal activity in the chemical sector is still there,” Schlosser says. “If you think about what’s driving all the deal activity — China, specifically, there is going to be continued consolidation, whether it’s trying to offset profit loss or think about how to best handle regulatory matters, so we think those fundamentals are still there. We continue to see the larger chemical companies think about their portfolios and continue to make investments in high-growth businesses and potentially divest or spinoff those businesses that don’t have as much synergy as they once did within the companies. We believe that will continue to occur.”
U.S. Outranks China for Growth, Say CEOs
The majority of chemical company CEOs around the world are confident they can increase revenues in the short and longer term, according to the 18th Annual Global CEO Survey 2015 conducted by PricewatershouseCooper.
Some 72% of those CEOs say there are more growth opportunities today than three years ago. While that might not be surprising, where those opportunities might come from was a bit of a surprise.
“For the first time in several years, the U.S. was rated as the top market for growth,” says Pam Schlosser, U.S. Chemicals Leader, PwC. “Fifty-three percent of CEOs picked the U.S. as being the top market for growth, slightly above China. That doesn’t mean the China is falling off; it’s clearly a strong No. 2.”
According to the survey, 38% of respondents expected “things will pick up in the coming 12 months.”
There are, of course, concerns. Over-regulation, high or volatile energy costs, rising interest rates and finding talent are a few of the potential pitfalls. Most of these are out of companies’ control, but having a plan can mitigate their negative impact.
“Chemical companies have to think about talent differently,” Schlosser says. “The skill set that is needed to continue to grow and invest in chemical companies is different than 20 years ago. Talent is a megatrend factor that we think will have an impact.”
According to the PwC’s CEO Survey, 63% of companies are actively searching for talent in different countries, industries or demographic segments, and 57% have a strategy for promoting talent diversity.
Another area of concern is unpredictable interest rates. “That is something our clients are thinking about,” Schlosser says.
There’s been some signaling from the Federal Reserve that interest rates might start heading back up.
“What impact that will have on growth and to M&A? What we’ve seen the last few years is unprecedented. I don’t believe there will be a complete downfall if interest rates start to tick up, but that is clearly something our chemical companies are thinking about.”
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