Agitation in Agriculture – Another CEO Change – Time to be Long
Syngenta’s CEO replacement is now the second major leadership move in the Ag space if we include the DuPont CEO exit. In our Chemical Monthly, published last week we talked about the likelihood of more M&A and restructuring in the broad sector driven by growth stagnation, deflation and an overall possible loss of both top line and bottom line growth. Agricultural chemicals is one of the major controversies within the sector, and it is clear that there are two schools of thought; the “everything is ok – stay on the steady path” view, and the “oh c&&p – we have run out of growth” view.
It is likely that the growth story is not as dire as suggested in option 2 above, but it is very likely that the easy GMO related growth is behind us – the pesticide tolerance, yield and better water and nutrient management traits for the large volume crops have now been around for a while. Initiatives from here are harder, generally smaller scale and face increasing non-GMO pressure. The yield issue is a particular problem as it has resulted in crop surpluses at a time of slow or in some cases no economic/personal spending growth, and for US based companies everything has been made worse by the stronger dollar and of course the much weaker Brazilian Real.
In our view we have had a group of willing consolidators; MON and (we think) DOW likely in this group and a group with their heads largely in the sand, clearly Syngenta and likely DuPont. It is unclear where BASF, Bayer and FMC sit, but FMC is not really in a position to play a proactive role.
In a consolidating industry as an investor you always make more money owning the targets and you sometimes make money owning the buyers. That said, in a consolidating industry in general you want to participate rather than watch from the sidelines.
Monsanto is a buyer and a survivor in our view – it is a well-run operation and is likely to create opportunities from any deal done. We think the Syngenta story is not over here and would want to own MON and possibly Syngenta, though MON could do a deal with DOW.
Dow Chemical likely wants to do a deal and is a natural seller, either outright, or more likely into a JV with DD where it would be the minority partner – this deal could be good for both companies, but is better for DOW given relative values – see recent work. Dow is a large and complex story, but likely creates a lot of shareholder value in any broader Ag consolidation.
DuPont has a long and unclear path ahead, but getting something done in Ag is probably one of the most obvious first moves. We have been advocating the DD/Dow move for years and it is the most likely and most obvious move for DD. DD cannot sell its business accretively in our view and would give a lot of upside away to a buyer because of cost and synergy opportunities if it did. DD cannot outbid MON for Syngenta
FMC is a passenger in all of this – without the Lithium business it would likely be a neat bolt on for a number of players – with Lithium it is a bit more complex. Given valuation, it is hard to resist FMC almost as an option as the M&A plays out.
We would own the sub sector and probably more than one name rather than making a specific bet. MON would be our favorite here, and then possibly DOW.