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Ag's $200bn megamerger spree 'may just be the start'

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The $200bn in megamergers among agrichemicals and fertilizer groups may only be the start of a deal wave for an ag industry seeking to revive its performance, after hitting a "rough patch for shareholders".

Agribusiness, investors' top bet in terms of total shareholder returns between 2007 and 2011, has suffered a "180-degree turnaround" - being one of the worst performers since, Boston Consulting Group said.

The industry's returns of 7% a year between 2012 and 2016 were lower than all but oil and mining, out of 34 sectors analysed.

The best bet was mid-cap pharmaceuticals, with a 24% annual return.

To improve their performance, ag groups must embrace mergers and acquisitions, as a means to "achieve value creation objectives", such as promoting cost savings while boosting potential for technological developments set to revolutionise the industry.

Deal appeal

"Companies with available cash should use M&A as a means to achieve strategic and operational objectives," Boston Consulting Group said.

"Mergers can promote cost synergies, enable the development of integrated offerings, and improve the efficiency and scope of research and development programmes."

Indeed, such aims have already spurred the four ag megamergers – Dow Chemical and DuPont, Bayer and Monsanto, ChemChina and Syngenta and PotashCorp and Agrium – whose value of more than $200bn exceeds the combined total of sector deals over the previous decade.

Many companies appear to be taking a "wait-and-see attitude pending the approval" of these deals which, for peers are particularly important, in potentially offering the chance to build scale from businesses sold off during the megamergers in order to win regulatory approval.

"Those companies that are unable to find the right M&A partner may miss a significant opportunity and fine themselves at a competitive disadvantage."

'M&A activity to rebound'

However, more broadly, "M&A activity appears ready to rebound", the management consulting group said, underling that the best successful groups at creating value for shareholders "rigorously target M&A opportunities to achieve their strategic and operational objectives".

In the agricultural equipment sub-sector, the group said outperformance by Japan's Kubota, in achieving 23% annual returns for shareholders, reflected a "well executed, global" acquisition strategy, besides a boost to competitiveness from a weakening yen.

In the crop processing segment, Ingredion's total shareholder return of 21% was helped by "value-enhancing acquisitions", besides a move to specialty ingredients which had protected margins.

Boston Consulting Group also advised ag companies to focus on products which boost prospects for farmers, whose tumbling profitability, in the face of weakened agricultural commodity prices, has been central to the drop in corporate shareholder returns.

"Agribusiness executive must realise that creating value for shareholders goes hand in hand with creating value for farmers," many of whom "will continue to operate at a loss, as few catalysts exist to lift commodity prices above their current depressed levels".

'Painful performance'

The best performing ag segment over the 2012-16 period, in terms of total shareholder returns, is that of protein processing, including dairy, fish and meat, with a figure of 17%, Boston Consulting Group said.

"The decline in crop prices has helped protein processors thrive," coming against a backdrop of falling prices of grains, and thus of livestock feed.

The worst performer was fertilizer, with a "painful" annual return of a negative 6%.

"Depressed commodity prices have weighted on farmer economics, constraining both volume and price growth for fertilizer producers.

"M&A may well play a significant role for fertilizer companies as the industry consolidates to generate additional cost savings."

By Mike Verdin

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