No Monsanto, No Problem for Syngenta: Real M&A

Syngenta AG may be primed for a deal, with or without Monsanto Co.

Syngenta and Monsanto held preliminary talks with advisers earlier this year about a combination that never came to fruition, people familiar with the matter have said. Syngenta’s willingness to have such conversations signals it’s open to a deal, whether as an acquirer or as a target, according to shareholder Wintergreen Advisers LLC. With shares down 9.5 percent in the last 12 months amid slowing revenue growth, Berenberg Bank said an acquisition could help the crop chemicals company improve its prospects.

One option for $34 billion Syngenta is a takeover of Dow Chemical Co.’s agricultural business, said Alembic Global Advisors and SunTrust Banks Inc. Dow Chief Executive Officer Andrew Liveris has suggested the company is open to divesting that unit. DuPont Co. and Basel, Switzerland-based Syngenta could also merge and then spin off the U.S. company’s non-agricultural businesses, said Zuercher Kantonalbank.

“The last couple of months weren’t that pleasing for shareholders,” Martin Lehmann, co-manager of 3v Asset Management’s 3v Invest Swiss Small & Mid Cap Fund, which owns shares of Syngenta, said in a phone interview from Zurich. “Management is under pressure to do something smart, and that’s not a bad thing.”

A representative for Syngenta said the company doesn’t comment on speculation. Representatives for Midland, Michigan-based Dow and Wilmington, Delaware-based DuPont declined to comment.

Multiple Partners

“There are a lot of ways to win here,” David Winters, CEO at Wintergreen, which oversees about $2.2 billion, including Syngenta shares, said in a phone interview. “They’ve tipped their hand that they’re willing to do something. Who they end up doing the dance with and mating with, we’ll see but they’re clearly at the dance.”

Monsanto, a $61 billion U.S. seed company, explored a takeover of Syngenta earlier this year that would have allowed it to move its legal address overseas for tax advantages, according to people familiar with the matter in June. The talks fizzled amid questions about strategic fit, antitrust issues and the relocation to Switzerland, the people said, asking not to be identified because the talks were private.

Monsanto later announced a $10 billion stock buyback, a move that Matt Arnold of Edward Jones & Co. says reduces the company’s financial flexibility.

Moving On

“The fact that maybe it didn’t happen with Monsanto doesn’t mean it couldn’t happen with someone else,” Bill Selesky of Argus Research Co., a New York-based analyst, said by phone. “It’s a very positive sign that they’re willing to sit down and talk and listen and possibly hammer out a deal. I wouldn’t rule out somewhere down the road that Dow or DuPont could buy Syngenta.”

While both companies may find a deal appealing, DuPont would probably be a better fit, Selesky said. Its seed business is bigger than Dow’s and has more brand recognition, he said.

A merger of $60 billion DuPont and Syngenta would create a balanced portfolio, split almost evenly between crop chemicals and seeds, a novelty in an industry where most companies focus on one or the other, Martin Schreiber, an analyst at Zuercher Kantonalbank in Zurich, wrote in an e-mail. If the two companies joined, DuPont could then spin off its non-agricultural operations and become a pure-play agricultural science company, he said.

Better Taxes

On the other hand, Dow may be a better candidate to use a Syngenta acquisition to relocate overseas for tax advantages, said James Sheehan, an analyst at SunTrust. With the Treasury Department weighing ways to discourage tax-inversion acquisitions, DuPont’s well-known brands and sales to the U.S. military may spark greater political pushback, he said.

“DuPont is likely to take a very cautious approach toward this issue,” Sheehan said in a phone interview from Atlanta. “Dow has a little bit more flexibility.”

Rather than sell itself, Syngenta could go on the prowl for acquisitions of its own, said John Klein, a London-based analyst at Berenberg.

Shareholders are getting impatient as a corporate realignment three years ago hasn’t yet delivered the desired results, Klein said. Syngenta’s 2013 profit fell short of analysts’ estimates and sales that year grew at the slowest pace since 2009.

“If they want to kickstart growth, they should make an acquisition,” Klein of Berenberg said by phone.

The 9.5 percent drop in Syngenta shares the last 12 months compares with a 19 gain for Monsanto and a 16 percent rise for DuPont. Dow has climbed more than 40 percent.

Today, DuPont climbed 0.3 percent to $66.15, and Dow was unchanged at $53.64.

Dow’s Situation

For Dow, selling its agricultural business may be a way to unlock value as activist investor Dan Loeb pressures the company to improve profitability, Sheehan of SunTrust said.

The $64 billion company is already planning to divest as much as $6 billion of low-return assets. Reuters reported yesterday that Dow is in the process of selling two of its speciality chemicals subsidiaries, which could get a combined $2 billion.

When asked about a possible deal for the agricultural division in July, Dow CEO Liveris said “there are no sacred cows.”

That unit and Syngenta share similarities that would unlock value if they were combined, Hassan Ahmed, co-founder of Alembic Global Advisors, said in a phone interview. “A Dow agriculture business and Syngenta marriage could actually result in significantly higher synergies than a Syngenta marriage with a more seed-oriented company such as DuPont’s agriculture business or Monsanto for that matter.”

Mark Gulley of BGC Partners Inc. estimated the unit, known as AgroSciences, could be valued at about $12 billion in a sale.

Alternative Ideas

Syngenta may be more inclined to make smaller acquisitions, said Patrick Rafaisz, an analyst at Bank Vontobel AG in Zurich.

“Syngenta is in acquisition mode, but targets are usually seed companies and bolt-on in nature,” Rafaisz wrote in an e-mail. A large deal, especially with a crop chemicals company, may not add value for shareholders and could distract management when the focus should be on managing costs and pressing ahead with its existing strategy, he said.

While Ahmed of Alembic says DuPont and Dow may be more focused on slimming down than bulking up, Winters sees the possibility of some sort of deal in Syngenta’s future.

“They’re probably willing to buy, they’re probably willing to sell,” he said. “Either way, that’s why we own the stock because we feel like it’s heads we win, tails we could win bigger.”