Brooke Sutherland is a Bloomberg Gadfly columnist covering deals. She previously wrote an M&A column for Bloomberg News.
BASF should take care that fear of missing out doesn't lead to rash actions.
The world’s biggest chemical company is considering gate-crashing Dow and DuPont’s merger with a bid of its own for the latter, people familiar with the matter told Bloomberg News last week. BASF may yet decide to stay on the sidelines, but the very fact that it’s considering such a move shows how much pressure the $63 billion German company is feeling to go from bystander to participant in the $120 billion wave of chemical dealmaking the past few months.
BASF Chairman and CEO Kurt Bock has been in the thick of the industry's biggest deals, even if he's never seen them to fruition. He reportedly weighed both a partial and full bid for Syngenta before the Swiss pesticide maker agreed to sell itself to ChemChina last month for around $45 billion including debt. DuPont CEO Ed Breen met with the chairman of a large chemical company in Short Hills, New Jersey –- seven miles from BASF’s U.S. headquarters -- just weeks before announcing the merger with Dow. The question is, why now and why DuPont? Arguably there are better deals for BASF.
As to the first, the simple explanation may be that everyone else is doing it, and with reason: Beyond mergers, chemical makers have few catalysts for growth. That much was reinforced last month when BASF projected a drop of as much as 10 percent in its earnings this year. Global gross domestic product and industrial production are barely budging, providing little support for chemical demand. Weaker agricultural prices, meanwhile, have forced farmers to cut back their seed and crop protection budgets. Faced with those pressures, the earnings growth and cost cuts promised by big deals start to look ever more enticing.
That said, DuPont, a $56 billion company, seems like a bit of an odd choice. Breaking up mergers is a tricky thing to do in any situation, especially if you’ve already been involved in the bidding and presumably already rebuffed. It will likely be even harder in this case given the sheer size of the transaction (Dow and DuPont have almost $75 billion in combined revenue) and the companies’ plan to pair their merger with a three-way breakup.
Dow and DuPont fit together in just the right way. It’s an ideal combination because it creates businesses that are bigger and stronger and yet more focused at the same time. BASF would struggle to structure a better deal or pull it off as efficiently as Dow. Even taking into account the most generous assumptions about business overlap, the synergies in a DuPont-BASF combination will be inferior, according to Sanford C. Bernstein analysts. It will take a sizable premium to convince DuPont holders to ditch the Dow deal, not to mention the fact that BASF would have to cover DuPont's $1.9 billion breakup fee. It's hard to make the math work.
If BASF is bent on disrupting one of these big mergers, it may be better off aiming for Syngenta. There's still a breakup fee to contend with, but at least in that case, there are some regulatory concerns around ChemChina as a state-owned Chinese enterprise that could make shareholders more receptive to BASF's advances. BASF would also face regulatory hurdles in a takeover, though: It has significant overlap with Syngenta in the crop-protection market, especially in fungicides.
The best big deal out there then is probably a purchase of Monsanto. The big allure of DuPont is its seed business, which would fill a hole for BASF as the only top chemical maker without a noteworthy position in that market. But DuPont is just the second-biggest producer of seeds -- guess who the first is? As a more focused agricultural company, Monsanto also doesn't come with all the chemical baggage that DuPont has, though divestitures may still be needed to address antitrust concerns.
Monsanto has traditionally played the role of the acquirer, kicking off this surge of dealmaking with its pursuit of Syngenta. But CEO Hugh Grant has repeatedly espoused the benefits of consolidation and may be willing to make his company the target for the sake of scale after Syngenta slipped away. With a market value of $39 billion, Monsanto would be a smaller and potentially a more accretive target for BASF.
BASF's best bet may be to think even smaller. The company's biggest purchases to date have been for around $5 billion. It would likely need to issue equity to pull off anything of the magnitude of a DuPont, Syngenta or Monsanto, something that historically hasn't been part of BASF's playbook. And it would be testing investors' trust a bit given its spotty track record with M&A. As my Gadfly colleague Chris Bryant has noted, more than six years after paying $5 billion for Swiss dye-maker Ciba, BASF was slashing jobs up until recently in an effort to make the division competitive.
There are a number of smaller targets. Syngenta may need to divest some assets -- ripe pickings for BASF -- while Dow and DuPont could offer up some businesses as well. Then there's Clariant's plastic and coatings unit, or even Clariant itself, a perennial $5.7 billion target.
BASF's Bock told Bloomberg Television just the other week that “we feel comfortable with what we have.” Comfortable is probably not good enough, and BASF's consideration of a DuPont bid shows it's not happy with the status quo either. But it doesn't need to get too crazy, either.
BASF also has an oil and gas business that's caused headaches as crude prices have slumped.
Utz Tillmann, head of Germany's chemical lobby, said last week that it would be good to have Syngenta in German hands.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
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