by Matt Porzio ,
When analyzing M&A trends in agriculture, there are two main sub-sectors to focus on: 1) farming; and 2) agribusiness, which includes companies that make fertilizer, insecticides, chemicals and seeds. Historically, the real action has been in the latter and there’s been tremendous consolidation whereby only a handful of players dominate the industry. Trends in the former, however, suggest that farming may soon become a hotbed of M&A activity.
Watering money field
Farming, particularly in most of the Southeastern and Midwestern U.S., is a large, yet highly fragmented, insular marketplace, typified by family farms, that is ripe for consolidation. Subsidized farming is relatively healthy and stable, economically speaking, though historically have undergone wrenching periods of belt-tightening and collapse. For those reasons, farming has not been a sector with much deal flow, and professional representation by investment bankers within farming is nearly non-existent.
The landscape may be changing, which would make farming a more attractive sector for deal professionals. Some of the current trends that are creating opportunity include:
- Generational change (openness to investment): Third and fourth generation family members are gaining control of farms and they are more open to strategies other than retaining full ownership, opening the door for outside investment, and expansion into other operations such as packaging, distribution and marketing.
- Openness to selling: To the extent that family farms are not passing control to a younger generation, owners are more open to the idea of selling.
- Surge in ag-specific capital: Farmland has been an attractive investment option for many years for institutional funds and other investors. However, there has been a surge of investment funds interested in this area, most notably, family investment funds, including those of Bill Gates, Michael Dell and a host of others.
- Vertically integrated operations: Traditionally, agricultural investments have been almost exclusively land based, meaning the investment thesis is in owning real estate, but not the operations. Over the past couple of years, a limited number of funds have begun to seek out and invest in vertically-integrated agricultural enterprises. This trend favors professional investment banking representation.
As mentioned above M&A and consolidation in large agribusiness has been active for years, to the point where the industry is now dominated by just a few players. Should the recently announced $130 billion Dow-DuPont merger be cleared, the new enterprise will control 25% of global commercial seed sales and 16% of world pesticide sales. And there’s likely more consolidation to come. The Dow-DuPont announcement rekindled Chinese state owned ChemChina’s $43 billion bid for Swiss company Syngenta; that deal was announced in early February. Sygenta agreed to the takeover bid after spurning a $46.5 billion offer a year ago from Monsanto.
Although the deals in this sub-sector seem to be confined to the larger, more traditional players in the space, the world’s biggest farm machinery companies, like John Deere & Company, may soon get into the act and make vertical acquisitions a focus of their growth strategy. They already have the hardware, are making deep investments in the software (agricultural data) and could quickly move to integrate seeds, pesticides and fertilizers into their portfolios.