FRANKFURT (Reuters) - With rivals joining forces all around, Germany's BASF BASFn.DE has been eyeing a surprise foray into generic pesticides, although the issue is on hold while it looks to snap up assets being spun off in those mergers.
With an internal debate raging about how to react to the mega-mergers, the world's third-largest crop chemicals supplier last year looked into acquiring U.S. pesticides peer FMC Corp FMC.N, according to three people familiar with the deliberations.
While considerations did reach a concrete stage, BASF for now feels such a move would needlessly complicate its examination of several billions in assets put on the block by rivals to allay antitrust concerns. But the strategic rationale is intact and can be revisited, the sources told Reuters.
BASF is the only player left among the top six in a global seeds and pesticides market worth over $100 billion that has not paired up with a major peer. Like most of its large rivals in crop protection, it has mostly focussed on developing new patent- protected compounds to command premium prices.
One reason to branch out into cheaper pesticides that have lost patent protection would be faster access to emerging markets such as Africa and China, where most farmers cannot afford the latest generation of Western crop chemicals, the sources said.
“In some of these markets, the prices of patent-protected products are beyond what’s affordable by a factor of 10,” said one source.
Companies such as FMC primarily use off-patent active ingredients or acquire the rights to novel substances from others. They focus development efforts on improving the application of a given compound in the field, or identifying new crops or geographic regions that can benefit.
This could, for instance, mean preventing spray from evaporating or drifting away with the wind to harm wildlife or neighbouring fields; it can take the form of making sure droplets stick to the target leaves and are absorbed or released at the optimum rate.
MARKET INSIGHT AND ACCESS
FMC declined to comment. A BASF spokeswoman said in a written statement that the group - which is also active in areas such as oil and gas, industrial petrochemicals, engineering plastics and vitamins - was constantly looking into possible takeovers and divestments.
The sources said that FMC’s market insight could help BASF compete better as the industry rushes to bypass wholesale trade and sell direct to growers with the help of digital tools.
FMC’s sales to farmers - expected to be around $2.2-2.4 billion this year - would help BASF to spread the costs of new direct-marketing channels across a wider revenue base.
Even though BASF Chief Executive Kurt Bock has said “big and fancy” deals do not always create value, discussions are in full swing at the 152-year-old company about how to cope with the emergence of much larger rivals in agriculture, the sources said.
With a considerable premium required on top of FMC’s stock market value of about $8 billion, the mooted transaction would be the largest in BASF’s history.
A foray into generic chemicals would offer investors an alternative strategic vision from that of its major rivals, which seek to link up seed and crop protection offerings.
BASF has taken the view that the benefits do not justify the tens of billions going into the mega-mergers. So far, it has avoided seed assets and instead pursued research into plant characteristics such as drought tolerance, which it sells or licenses out to seed breeders. But investors are still keen for reassurance.
“It is good to have somebody at the helm who doesn’t feel pressured to follow just any trend. But if everyone around BASF is consolidating, there is a risk that, over the long term, the question will be: Why didn’t it join in?” said one fund manager holding shares in BASF, who asked not to be named.
NEW USES FOR OLD CHEMICALS
Other players in the off-patent industry are ChemChina's Adama, with about $3.1 billion in sales; and Platform Specialty Products Corp's PAH.N Agricultural Solutions unit with about $1.8 billion in sales, made up mainly of Arysta LifeScience Corp.
FMC in 2014 boosted its off-patent crop chemicals operations with the $1.8 billion acquisition of Denmark’s Cheminova, paying about 13 times core earnings. But the sub-sector has received little attention during last year’s unprecedented slew of major deals.
Still, growing consumer concerns about toxicity have prompted environmental regulators around the globe gradually to raise the bar for approving new crop protection substances.
This has encouraged the industry to find new uses for decades-old substances. The discovery of a genetic tweak that makes field crops survive the generic weed killer dicamba, for instance, has prompted the industry to develop more environmentally friendly dicamba versions that evaporate less when sprayed.
BASF’s executive directors have for their part pointed to the opportunities to snap up assets being sold off in the course of the mega-mergers.
Sources familiar with the process say BASF is primarily eyeing herbicides and insecticides businesses from Dow and DuPont’s planned $130 billion merger and three-way split, but also seeds and herbicides businesses expected to be sold by Bayer as part of its $66 billion takeover of Monsanto.
CEO Bock said a month ago that, even though the crop protection unit was performing very well, he would like it to be bigger.
Excluding expected asset sales, the Monsanto-Bayer deal will create an undisputed market leader with 27 percent of global seeds and pesticides business.
Even the 17 percent accounted for by Dow and DuPont, before asset sales, would dwarf BASF’s 7 percent share.
FMC derives about two-thirds of its sales from crop protection, with food and drug ingredients and lithium chemicals accounting for the rest.
BASF’s spokeswoman said that its acquisition strategy focussed on businesses that meet criteria such as innovative strength, above-average growth, a focus on attractive regions such as emerging markets, and shielding the portfolio against cyclical swings.
Additional reporting by Arno Schuetze; Editing by Kevin Liffey
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