With an unprecedented flurry of mergers and acquisitions hitting the agriculture sector, consolidation was one of the primary talking points at the Agri Investor Forum Chicago event this week.
On one hand, the new companies being created could be “so big that it will be hard to create new companies to challenge them,” Anne Greven, managing director with Rabobank, suggested as she moderated a panel discussion on market consolidation.
Private equity firms already face great challenges entering agriculture, from technological learning curves to the sophistication required to fund highly capital-intensive businesses, panellists noted.
Consolidation could add to those challenges by stifling competition, as has been echoed by politicians (like former US presidential candidate and Vermont senator Bernie Sanders), regulators and small farmers across the country.
But private equity investors will also find investment opportunities as new businesses are spawned by redundancies resulting from the mergers, panellists said.
In the case of the $66 billion merger between Bayer and Monsanto, for instance, the deal could present overlaps in various seed businesses, and the companies may find it necessary to sell those off. In turn, private equity firms can move in to capitalise the new companies.
“Some of these secondary and tertiary businesses will be sold off initially and that could be very attractive for private equity,” said Mitchell Presser, partner with Freshfields Bruckhaus Deringer, during the panel.
But no one said it would be easy. Presser said consolidation “will both create opportunities and make it harder” for private equity firms which have traditionally required “a very clear thesis”.
“We will see more people going in but there are risks and new entrants will learn tough lessons along the way, and those who do well will likely have been in the business and already learned those lessons in the past,” he said.
Alejandro Quentin, founder and chief executive of Pampa Capital, said that he believes “the consolidation will bring down costs, but also bring down innovation” as larger companies become less nimble and fall back on existing technologies.
“For many investors it will be more difficult working in merging markets because the working capital requirements are huge, especially when financing farmers,” he added.
Agricultural companies are understood to be merging in part due to declining crop prices that are weighing on profits. In addition to the Bayer and Monsanto deal, DuPont struck a $130 billion merger deal with Dow Chemical., and ChemChina is looking to buy Syngenta for $43 billion. The deals have fallen under watchful eyes and continue to fight regulatory hurdles.