Food security sows seeds for agribusiness M&A

Data InsightDealspeak 15 June

Food security sows seeds for agribusiness M&A

The USD 18bn offer for Canadian grain handler Viterra by St Louis, Missouri-based Bunge [NYSE:BG], announced 13 June, places the focus back on the companies that grow, process and distribute our crops.

The combination puts the group on par with rivals Archer Daniels Midland [NYSE:ADM] and privately held Cargill, which also process grain and oilseeds at crushing facilities to make biodiesel fuel, vegetable oil and animal feed.

Given higher grain prices caused by supply chain disruptions during Covid-19 and the Ukraine war, agricultural traders have been looking at strengthening their positions to better smooth out seasonal and geopolitical volatility in world markets.

The deal comes after Bunge spent 2017-18 exploring mergers with ADM and Glencore [LON:GLEN] without agreement at a time when bumper crops had driven down grain prices and margins.

Mergers and acquisitions targeting the North American-based agribusiness sector – from seed companies and agrochemical producers to those processing and distributing the crops – has mostly tailed off in recent years.

Major consolidation among the biggest seed companies took place in 2015 and 2016, when Dow Chemical and Dupont combined in a USD 81.9bn deal and Bayer [ETR:BAYN] bought Monsanto for USD 66.3bn.

The Bunge/Viterra transaction is the 5th biggest agribusiness deal on Mergermarket record and puts 2023 deal volume at the highest level since 2019, the year a combined DowDupont spun off its ag division Corteva [NYSE:CTVA] for USD 20bn.

Sowing the seeds

Those mega deals have left the North American seed sector largely consolidated. In 1978, roughly 500 corn seed companies existed, now a handful remain, said Mark Wong, president and CEO of S&W Seed Company [NASDAQ:SANW], which develops sorghum and alfalfa seeds.

The world’s Big Six seed companies are now down to four – Bayer, Corteva, Switzerland’s Syngenta, and Germany’s BASF [ETR: BAS].

But a slew of smaller companies, such as S&W, Bioceres Crop Solutions [NASDAQ:BIOX] and Lavoro [NASDAQ:LVRO], are either using gene editing or biological seed treatments to enhance a crop’s drought tolerance, lower gluten in wheat or improve pest protection.

Because it takes six-to-eight years to develop and test a successful seed breed in the field, each company can be highly valuable to larger acquirors, said Wong, who previously built seed companies through M&A before selling them to Dow and Monsanto.

Buyers typically look at two things in seed companies, said Wong, whether they own a quality genetic “trait”, such as herbicide resistance, and whether they own a “germplasm”, or the genetic sequencing for a particular plant that grows well in the field. S&W has one such trait in sorghum. But it suffers from the small-cap curse – not getting enough recognition on the Street. To unlock shareholder value, it may look at spinning off or divesting one or more of its three units: its forage business in Australia and Middle East; its sorghum seed business, and a biofuel joint venture with Shell.

Food security

Food security is agribusiness’s biggest tailwind. It became a top priority after the Ukraine war put the world’s wheat supply under threat.

Two trends among seed developers can help. Biologicals – organic coatings added to seeds to improve plant vigor – is one. Besides the Big Four seed companies, others offering biologicals include Novozymes, Valent BioSciences, Precision Laboratories, and Koppert.

Gene editing – making precise modifications to specific genes to create, for example, drought-tolerant crops – can also help. It is distinct from more controversial genetically modified organisms (GMOs), where foreign genes are forced into a plant.

As declining farming acreage combined with a rising population forces the need for increased productivity, the speed of approving genetically engineered crops that can grow in less favorable climes could increase, Bioceres CEO Federico Trucco said at an investor event in March. Water scarcity around the world will also pressure global agriculture to switch to drought tolerant crops.

“It might be a good thing to be in the seed business,” said Wong.

Analytics by Izaz Ansari

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