The downdraft in the commodities market has crop prices in a slump, and that has stumbling E I Du Pont De Nemours And Co (DD) — better known to most as just DuPont — looking at making a deal with agriculture company Syngenta (SYT), according to reports.
It will be interesting to what DD activist investor Nelson Peltz thinks about this. He pushed DuPont to spin off the ag unit last year, only to be shot down by the company’s former CEO.
DD is also exploring a potential alternative deal with Dow Chemical (DOW) to combine their agriculture segments. Should either deal come to pass, it would create a market-share giant in the pesticides market.
The industry needs such consolidation. Global crop prices are in an extended slump, and that’s hurting demand for pesticides and seeds. Putting competitors together would cut costs, boost R&D resources and generate economies of scale.
As an aside, the deal would also put Monsanto (MON) in a tough position. MON put Syngenta into play at the end of the summer with an unsolicited $46 billion offer that it then dropped when SYT showed no interest.
A DuPont-Syngenta combination would have Monsanto facing a much bigger competitor.
So don’t be surprised if MON makes another stab at mergers and acquisitions. After all, Dow is clearly interested in ditching its seeds and pesticides business.
The deal activity comes as no surprise — industry executives have openly talked about pursuing such tie ups — and DD investors appear to applaud this course. DuPont stock rose as much as 1.8% in early trading on the news.
DD Stock on the Mend?
The market has been happier with DuPont stock over the last couple of months, thanks to large shareholder Nelson Peltz rattling the company’s cage and the resignation of CEO Ellen Kullman.
By the end of September, DuPont stock was sitting on a year-to-date loss of nearly 33%. A sharp rebound in a short period of time now has it 6% below breakeven. Further gains will depend partly on how well DD solves a laundry list of other problems, but the agriculture segment was a great place to start.
On the top line, the ag division accounted for 22% of sales in the most recent quarter. At the same time, it was the only major line of business to report an operating loss. Losses there are mounting, as well, to $210 million from $56 million in the year-ago period.
And there’s no question DD has to do something bold. In addition to a strong dollar, a global slowdown in agriculture is killing margins and there’s nothing pointing to an end anytime soon. Brazil alone is acting as a huge drag on results and is mired in recession — further cost cuts aren’t enough in such an environment.
That DD is exploring strategic options for its ag division is a good sign that management has its priorities in order and is listening to Nelson Peltz.
At this point, DuPont stock doesn’t necessarily get the benefit of the doubt as to whether it’s appropriate for new money, but it’s not looking too shabby either.
If nothing else, this is a story worth watching.
As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.
