A perfect storm for mega deals
Understanding the flurry of agricultural M&A in 2015 requires understanding the context in which these mega deals transpired.
China going cold; Africa, developing world warming
With China’s outsize influence over global trade—importing over ten percent of the world’s soybeans, rice, powdered milk, fluid milk, cotton, pork, and walnuts, among others agricultural goods—even the smallest shifts, real or anticipated, in Chinese demand have global reverberations.
Chinese economic growth has been slowing, and when it devalued its currency in August 2015, many global industries panicked: a weaker yuan meant reduced purchasing power for the Chinese and therefore reduced overall demand for commodities. As it became apparent that its economic woes were complex and could linger, confidence in and optimism about the Asian superpower—while not destroyed—was shaken; highlighting the need for many global companies to further diversify their international consumer base beyond the East Asian superpower.
Africa and the developing world more broadly—thanks to rising incomes, booming populations, more resilient economies, and the increasing ease of doing business there—has become a natural choice for companies looking to diversify their consumer base. While rising incomes have obvious benefits to agribusiness—farmers earning more can buy more—the impact of higher incomes is especially exciting for companies selling fast-moving consumer goods. Given that demand for processed foods is expected to continue on its downward trajectory in many developed countries as consumers there become more health-conscious, rising interests from frontier markets will only become more critical to food conglomerates.
According to Euromonitor, for example, Mars now derives 31 percent of its sales from emerging markets; Nestlé 47 percent; and Danone Group 61 percent. Important to note here is the fact that while the BRIC countries (Brazil, Russia, India, and China) are responsible for a substantial share of these sales, at between 51 and 62 percent for the three aforementioned countries, those figures serve to highlight the importance of non-BRIC countries to emerging market sales for each company.
America - The eye of the storm
Of the $5 trillion in mergers and acquisitions in 2015, US companies accounted for roughly half that value, or nearly $2.5 trillion: a domestic record on top of an international one.
The US Federal Reserve (the Fed) has been hinting all year that it would be raising interest rates for the first time since 2006. As a part of its strategy to encourage American recovery from the 2008 financial crisis, the Fed lowered interest rates to nearly zero that year in order to encourage spending and economic growth. Now, as employment rates and market activity reach pre-recession levels, the Fed will continue to raise interest rates to stabilize inflation and the economy in general. Aware of this timeline, American companies seized the opportunity to access favorable financing while it lasted. A strong US dollar further leveraged the terms of trade for American companies looking to acquire or merge with other businesses, especially those abroad.
While American agribusinesses may have had easy access to debt and favorable exchange rates, 2015 was a difficult year for the agricultural sector as a whole. In late November, the USDA announced that farm incomes in the US had fallen roughly 38 percent in 2015 to their lowest levels in thirteen years due to persistently low crop and livestock prices. With lower incomes, farmers have less to spend on farming products, meaning that agribusiness profits are sliding—thus prompting pressure from investors to find alternative sources of revenue. The result has been a whirlwind of companies panicking to consolidate and cut costs through new synergies and better take advantage of new markets, especially across the developing world.
Kraft - HJ Heinz
Announced on March 24th, 2015, the merger between HJ Heinz Co. and The Kraft Foods Group—the value of which was undisclosed but understood to be between $45 and $50 billion—was at the time the largest of the year. The combined entity, Kraft Heinz Co. will be the fifth largest food company in the world. Its brands will include Oscar Mayer Meats, Maxwell House coffee, and Planters nuts—among dozens of other brands selling more processed food items.
Beyond vacillating production costs, Kraft and Heinz had both been struggling with decreased demand in their biggest markets, particularly in developed countries. Following the spin-off of Mondelez from Kraft in 2012, with the former focused on international growth and the latter on the North American market, Kraft’s focus narrowed and 98 percent of its sales are now derived from North America. And in 2014, its American market share plunged nearly 40 percent, which was attributed to a growing shift in consumer preferences away from highly processed foods. While Mondelez retains the right to market many of their shared brands in international markets there are several brands which Kraft retains the right to market globally, and it appears eager to do so.
The $1.5 billion in annual cost savings aside, the merger between the two companies would enable Kraft to access Heinz’s global networks, as the the latter derives 60 percent of its sales from regions outside of North America and 25 percent from emerging markets. As wages in the developing world continue to grow—and with them the ability to buy processed foods, and the interest in branded processed products in particular—more mega deals are likely to emerge among the international food giants.
Anheuser-Busch InBev - SABMiller
Not to be outdone, the beverage industry was quick to respond with its own mega deal. Despite four previously failed bids, Anheuser Busch InBev finally acquired SABMiller for $107 billion in November 2015, representing one of the five largest acquisitions in any industry ever. The beer companies were already the world’s two largest, being products of mergers themselves. Dubbed “Megabrew,” the deal will give the new entity, which has yet to be named, control over half the global industry’s profits assuming no regulatory divestiture is required. AB InBev was able to secure a record $75 billion in financing and loans for the deal, a fact which may signal that the environment for such deals is supportive.
The deal is expected to save the merged entity nearly $1.5 billion in synergies and put AB InBev in a better position to mitigate stagnating growth in its primary markets such as in North America where volumes actually declined by about 1.5% in 2014 as preferences continue to shift towards craft beers.
The acquisition would enable AB InBev to rapidly increase its global footprint: SABMiller, being the product of South African Breweries’ (SAB’s) 2002 acquisition of Miller, has diverse global networks, especially in Africa, where close to 100 million people are expected to be 18 and of legal drinking age by 2023.
Dow - DuPont
The experience of the chemicals industry has not been much different.With muted profits expected to extend into the foreseeable future, it was no surprise that in December 2015 two giants of American industry, Dow Chemical and DuPont—the world’s second and sixth largest chemicals companies by revenue, respectively —announced their merger. The largest deal in chemicals history, the $130 billion company will eventually split into three new, independent and publicly traded businesses, through which executives can raise additional revenue. Focusing on agriculture, material sciences, and speciality products, respectively, the new business structure is expected to save $3 billion in cost synergies and create $1 billion in new growth synergies, according to executives.
But as a corporation that will continue to market a significant proportion of its products to farmers, DowDupont’s revenues will to an extent be tied to global commodity prices and the ability of its target market to buy its products. So far, response to the deal has mostly been tempered. Some industry experts, as they have with many of the other mega deals this year, expressed concern over the role of “activist investors” playing strong-handed roles in the deals; as well as concern over how long an effective merger would take for the massive new entity, and how long it will take to actually see those synergistic benefits.
Progressing and prospective
Despite the Fed’s decision in late December to raise interest rates, debt is still in historically favorable terms. Furthermore, with global commodity prices projected to stay at relatively depressed levels well into 2016, companies across various industries, especially agriculture, are still actively shopping around for their next merger or acquisition. It may ultimately be 2016 and not 2015, therefore, that becomes the year of the mega deal.
Syngenta: Monsanto v. ChemChina
In 2015, one of the most talked about agricultural mega deals was one that has not yet been agreed upon. Seed giant Monsanto made three separate bids, ranging from $45 to $47 billion, for Swiss chemical and seed manufacturer Syngenta—all of which were flatly rejected by the Swiss company.
But for Monsanto, there are many relevant details that make such an acquisition attractive and future attempts worthwhile. As mentioned previously, flattened commodity prices have left farmers with less money to spend on excess pesticides or genetically modified seeds, meaning Monsanto is looking elsewhere for new sources of revenue during the global slump, especially if it wants to meet its publicly-stated goal of doubling earnings by 2019. The deal would also allow Monsanto, whose stagnating seeds business accounts for 70 percent of its sales, to instantly become one of the largest providers of crop protection chemicals in the world, not to mention the tax breaks it would receive by relocating from the United States to Switzerland. But ultimately, Monsanto’s primary desire is likely to access Syngenta’s global portfolio and network—its primary markets, by far, are the US and Latin America; while Syngenta’s two biggest in 2014, Latin America and the combined group of Europe, Africa, and the Middle East .
Monsanto still faces significant hurdles to its desired acquisition, including Chinese import approval and China’s own ChemChina bid on Syngenta. Encouraged by President Xi Jinping himself, ChemChina—China’s nationally owned chemical company—has recently taken large strides toward making the largest acquisition ever by a Chinese company in its $42 billion bid for Syngenta.
ChemChina’s acquisition of Syngenta would enable China to become a major producer of GMOs, just as policymakers there continue to hint at their imminent legalization (only a handful GM food products are currently legal in China). Such a deal would leave Syngenta mostly intact; and although ChemChina’s initial $42 billion dollar was also rejected, industry experts are more than confident that both parties will make new bids in 2016.
Glencore sell off
Rather than announcing a record setting merger or acquisition, mining and trading house Glencore made headlines when its stock unexpectedly lost almost a third of its value in one day—dropping to a low of £68.62 a share on September 28th from a high of over £300 in May. And while its share prices did recover, it did send a clear signal that investors were more than worried about the amount of debt in the industry, especially with commodity prices—and therefore company assets—at record lows due to a slowing China.
Since September, however, Glencore has been aggressively selling off its assets to cut its multi-billion dollar debt and ease investor tensions. Thus it came as no surprise when on December 10th, 2015, Glencore announced its intent to either seek an initial public offering for its agricultural business or to sell a minority stake in it, an offer which may well be 2016’s first agricultural mega deal.
Many elements of the perfect storm enabling the high volume of M&A activity in 2015 will likely still be in place in 2016. With the Chinese economy continuing to cool, the developing world continuing to warm, and developed countries such as the United States in positions to take advantage of these favorable terms, 2015 may only be setting the stage for an even more dynamic 2016.
As we have seen though, just because deals are being made does not mean that they are going to be successful. Perhaps most telling, company shares have almost universally dropped after their respective deals were made. In the case of Kraft Heinz, for example, rumors began to swirl around another merger with food giant Mondelez International only a month after the initial deal was finalized —all of which happened before Kraft Heinz posted losses of over $300 million in the third quarter of 2015. DowDuPont did not fare any better: within 24 hours of the official announcement, shares for Dow and DuPont had fallen 3.9 and 5.8 percent respectively, further underscoring investors’ confidence that the merged entity will not be turning large dividends for the foreseeable future. While AB InBev’s stock has risen in the past few months, by the opening of 2016, it had already fallen back to its levels in November when the initial deal was struck.
If there’s one thing that is clear then, it’s that surviving a perfect storm is still more about necessity than is opportunity.