Agrochemical companies on alert after EU opens in-depth Dow, DuPont review

August 15 2016. By Dafydd Nelson.

EU competition officials have sounded a warning to agrochemical companies with designs on merging by opening an in-depth probe into the planned combination between Dow Chemical and DuPont.

China National Chemical Corporation, which agreed to buy Syngenta in February for $43 billion, would have taken note of the European Commission’s move. As would Germany’s Bayer, whose $64 billion bid was turned down by rival Monsanto last month.

The European Commission has made it clear that consolidation among the world’s big crop protection and seed companies won’t be waved through.

Dow and DuPont had offered to amend their deal during the phase I assessment to allay the commission’s misgivings about the planned merger. But the regulator didn’t even seek feedback on the concessions from industry participants — a clear signal that the offer wasn’t good enough.

The main sticking point could have been EU concerns about the impact of the deal on innovation for crop-protection and seeds products.

Last week’s announcement by the EU that it had opened a phase II review stated that the two US companies had a “strong track record of bringing innovative crop protection and seeds products to the market.”

In particular, the commission focused on innovation in the crop-protection space.

The regulator said Dow and DuPont are “important innovators” in that area, and it was one where there are a “limited number of global companies with significant [research and development] capabilities.”

Dow and DuPont, though, do face strong rivals in crop protection spending. Syngenta, Bayer and Germany’s BASF are all significant players in crop-protection R&D.

But the Brussels-based regulator is particularly keen to make sure innovation doesn’t suffer when companies merge.

Reason to worry
ChemChina and Bayer now have good reason to worry about how the EU regulator will view their deals. But the Chinese company hasn’t yet filed its takeover of Swiss firm Syngenta for EU review, and Bayer and Monsanto have yet to strike a deal.

Even so, the Dow, DuPont combination would “take place in industries that are already globally concentrated,” the commission said. The worry will be that simply divesting assets might not be enough to appease the EU executive, and that the commission might be bent on preventing excessive consolidation in the agrochemical industry.

In addition to innovation, the commission also said it was worried that Dow and DuPont might “tie their sales of crop-protection products and seeds” — a conglomerate concern.

Selling selected overlapping assets can be easy enough. Dealing with conglomerate issues is also possible, though it might require even bigger divestments.

Resolving misgivings about innovation could be more of a wild card. Offloading assets to a rival might not be enough if the acquirer lacks the same incentive as the merging companies to keep developing new products.

The EU regulator now has until Dec. 20 — and most likely into the beginning of next year with likely review extensions — to decide how serious its concerns about the Dow, DuPont transaction are.

The US companies said last December that they had agreed to an all-stock merger, creating a chemical producer with a market capitalization of $130 billion.

Shares in both Dow and DuPont trade on the New York Stock Exchange.

The commission’s case file number for the review is M.7932.