DD DuPont de Nemours Inc

By Jacob Bunge And Eyk Henning 

The potential merger of DuPont Co. and Dow Chemical Co. could spur agricultural rivals to forge their own partnerships, further shrinking the handful of companies that dominate the global seed and pesticide business.

The two U.S. chemical giants are considering a combination that would lead to a three-way split of their businesses post merger, The Wall Street Journal reported this week. Uniting Dow and DuPont's agricultural units would create a deeper pesticide portfolio against weeds, bugs and fungi and a stronger franchise in genetically modified seeds, ratcheting up competition with Monsanto Co., the top global seller of seeds, and Syngenta AG, the world leader in pesticides.

Dow and DuPont get most of their revenue from sales of chemicals and materials, but a combination wouldn't sharply shift the competitive landscape in that relatively fragmented industry. A deal would, however, be the first major shake-up in more than a decade for the seed-and-pesticides business currently led by six firms including Germany's Bayer AG and BASF SE. Those companies are contending with weak crop prices world-wide that have pinched farmers' wallets and forced them to curtail spending on everything from seeds to fertilizer and tractors.

"It is just the beginning" of consolidation in that area, said Mark Gulley, principal of New York-based chemicals consultancy Gulley & Associates LLC. "The industry's overdue."

Monsanto kicked off the current deal making wave last spring when the biotech seed giant proposed to buy Swiss rival Syngenta. After unsuccessfully courting Syngenta investors and sweetening its offer to $46 billion in cash and stock, Monsanto dropped its pursuit in August, though Monsanto executives have continued to say the deal would have been a good one.

Syngenta has at least one other suitor--China National Chemical Corp., or ChemChina--interested in acquiring the company, people familiar with the discussions said. The state-owned Chinese company isn't currently a major force in the agriculture sector, but biotech crops' capacity to simplify pest control and improve yields has gained prominence in China.

Though China's government has put restrictions on cultivating GMO crops, the country is investing in plant biotech and pushing to consolidate its fragmented seed industry in an effort to modernize its agricultural industry. Chinese firms' expansion has contributed to overcapacity in some parts of the chemical industry, pressuring profit margins.

Some Syngenta investors say the company's board should consider deals since a Dow and DuPont merger would shrink the playing field.

"If Dow and DuPont are gone. that does reduce the favoured options for Syngenta," said Folke Rauscher, a Swiss-based investor relations executive and Syngenta shareholder who in October helped form a shareholder group to push for changes at the company.

Mr. Rauscher, who met with Syngenta chairman Michel Demaré in late November to discuss his group's concerns over Syngenta's stand-alone prospects, said the group would refresh its call for Syngenta to begin an auction process.

Monsanto has stressed its own independent strengths after dropping its Syngenta pursuit. But executives have said the company continues to eye potential deals as a way to expand Monsanto's chemicals franchise, a business the company had de-emphasized over the past 15 years as it focused on developing biotech seeds.

"We like where we sit today, both with what we have in hand right now, as well as the ability to pursue additional options," a Monsanto spokeswoman said. Acquisitions must fit Monsanto's strategy, allow for cost reductions and provide new ways to grow. "There are options out there that can meet those objectives," she said.

"Despite a lot of noise, we have no pressure to act rashly," she said.

Industry executives say mergers could help develop new seed and chemical products faster, and strip out costs in a research-heavy business. It can cost about $136 million to identify helpful genes, successfully insert them into crop seeds and secure regulatory clearances around the world, according to a 2011 study by Phillips McDougall Ltd.

For BASF and Bayer, a counterbid for Syngenta would be costly and would likely require significant divestitures to resolve antitrust concerns, say analysts. A sale of Syngenta to ChemChina, a relatively minor competitor in the global market for agricultural chemicals, wouldn't pose the same competitive threat to seed rivals as a Syngenta-Monsanto combination, bankers say.

Unlike a combination with Monsanto, a tie-up with ChemChina, one of China's largest state-owned businesses, likely would face fewer antitrust hurdles, people familiar with the situation said.

Some Syngenta investors prefer Monsanto as a partner. "The synergies in terms of costs, distribution and R&D would create huge value for shareholders and establish a dominance that would be difficult for any competitor, including a Dow/DuPont, to rival," said Magnus Spence-Jones, an analyst at fund manager THS Partners LLP.

Merging Dow and DuPont could provide an opportunity for the German companies to expand their North American seed franchises, which lag those of rivals. The combined company might keep DuPont's highly regarded seed business, which holds 35% of the U.S. corn market and a third of soybeans, and divest Dow's smaller units to ensure antitrust clearance, according to analysts.

"If Dow's seed business is going to be up for sale, you can be sure the Germans are going to bid on it," said Mark Connelly, an analyst with CLSA Ltd.

A spokeswoman for BASF declined to comment. A spokesman for Bayer said that agriculture "is a core business of Bayer" but declined to comment on specific deal possibilities.

John Revill contributed to this article.

(END) Dow Jones Newswires

December 10, 2015 19:59 ET (00:59 GMT)

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