By David Nicklaus – S. Louis Post Dispatch, 5 May 2015
Agrochemicals maker Syngenta’s logo is seen in front of the company’s headquarters in Basel on Feb. 6, 2013. (photo by Arnd Wiegmann/Reuters)
After spending a couple of decades diversifying away from crop chemicals, Monsanto may be about to expand that business in a big way.
According to press reports last week, the Creve Coeur agricultural giant has resumed takeover talks with Swiss competitor Syngenta, whose revenue mix looks like the Monsanto of 15 years ago.
Back then, Monsanto got 70 percent of its revenue from Roundup and other chemicals and 30 percent from seeds and traits; those numbers are now reversed. Syngenta last year got about three-fourths of its revenue from crop chemicals and less than one-fourth from seeds.
Moreover, Monsanto probably can’t buy all of Syngenta’s seed assets. Antitrust regulators may force it to find a separate buyer for the U.S. corn and soybean businesses, which are Syngenta’s largest crops.
At first glance, buying a chemical-heavy competitor doesn’t look like an obvious move for Monsanto, which has been rewarded for the rapid growth and high profit margin of its seeds business. The two companies have nearly equal revenue, but Monsanto’s market capitalization is two-thirds larger.
“In the chemical business, it is a lot harder to differentiate yourself,” says Matt Arnold, an Edward Jones analyst who follows Monsanto. “Seeds and traits is definitely a more favorable place to be.”
Why, then, would Monsanto want to get bigger in crop chemicals?
For one thing, the need for them isn’t going away soon. For another, Syngenta has new products like Elatus, a fungicide used on soybeans, peanuts, potatoes and other crops. It sees Elatus as a potential billion-dollar seller.
“Syngenta has products that have grown nicely and have good margins,” Arnold said. “It is not a commodity chemical business.”
Monsanto also is being an opportunist. Syngenta has struggled recently and until last week, when the renewed takeover talks were reported, its shares were down about 20 percent in the past year.
At the same time, U.S. rivals DuPont and Dow Chemical are preoccupied with issues of their own, making them unlikely to enter a bidding war over Syngenta. Dow just gave two board seats to activist Daniel Loeb, who once pushed for a breakup of the company. DuPont is in the process of spinning off part of its chemicals business and is battling another activist investor, Nelson Peltz.
If Monsanto wants to go bargain-hunting, now looks like the time.
The deal is a long way from being done, however. Monsanto and Syngenta broke off merger talks last summer, when part of the plan was for Monsanto to switch its legal headquarters to Switzerland.
That tax-saving tactic, known as a corporate inversion, has become increasingly controversial, and the Treasury announced rules last fall that make it less lucrative.
Taxes are probably a less important part of the current talks, Arnold thinks. “If it requires an inversion for the economics to work, that would be an uncomfortable scenario for us as investors,” he said.
Antitrust regulators could pose the biggest obstacle. Monsanto will readily agree to sell some businesses, such as Syngenta’s U.S. corn and soybean seeds, but if regulators push for more, the deal might unravel.
Getting clearance in Europe could be especially difficult. Regulators there often take a tough stance on big mergers, and the European public’s skeptical attitude toward biotechnology in general, and Monsanto in particular, could play a role.
Of course, Monsanto’s long-term goal is to win over those skeptical Europeans. Perhaps becoming a more European company is now part of its strategy.
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