BASF, Bayer Agrochemicals Gloom Adds Urgency to Push for Deals
August 17, 2017
August 17, 2017 by Bloomberg
BASF SE and Bayer AG cut the outlook for their agrochemicals businesses, adding to the urgency for global consolidation that’s swept the industry in recent months. Both German companies reported earnings Wednesday that were weighed down by lower demand for the herbicides and pesticides made by their crop sciences divisions as a global slump in commodities prices hurts farmers’ incomes. BASF and Bayer said profit for their operations in the sector will likely be weaker than previous forecasts. “The agriculture market has gotten more difficult and that can certainly be a trigger for market consolidation,” said Thorsten Strauss, an analyst at NordLB, who covers both companies. “Cheap financing conditions also play a role.”
The earnings come amid the biggest wave of mergers and acquisitions in the industry including Bayer’s $55 billion takeover offer for Monsanto Co. and the planned tie-up between DuPont Co. and Dow Chemical Co., which will result in a carve out of a new crop-science unit. China National Chemical Corp. is also working towards the acquisition of Syngenta AG of Switzerland. Monsanto earlier this month rejected Bayer’s overture, leaving the German chemical giant to decide whether to raise its bid a second time in its quest to create the world’s largest producer of seeds and pesticides. At the same time, Monsanto and BASF have been talking about a possible combination of their agrochemicals businesses, according to people familiar with the matter.
Bayer on Wednesday said full-year profit for its agrochemicals division will probably decline by a low-single-digit percentage, instead of climbing as it had previously projected. Its key measure of profit -- earnings before interest, taxes, depreciation and amortization, before some costs -- dropped 8.2 percent for the division. Monsanto last month published worse-than-expected earnings and sales. “Monsanto’s negotiating position has not become stronger,” Daniel Wendorff, analyst at Commerzbank AG in Frankfurt, said by telephone. “Bayer can still argue that the weak market environment in crop science will persist and it will certainly use that from its side.” For its part, BASF has so far remained focused on cost-cutting and pruning its sprawling empire of basic and specialty chemicals for industries ranging from cosmetics to crude-processing. Deputy Chief Executive Officer Martin Brudermueller said last month the company won’t be driven into a corner by what is happening in the market even as people familiar with the matter have described a revival of talks with Monsanto. “Our agricultural business isn’t up for sale,” BASF CEO Kurt Bock told reporters on an earnings call. After profit at the division fell 12 percent in the second quarter, he said the South American market remains a “big unknown” and Europe is unexpectedly weaker. “It’s possible that earnings at crop protection will be weaker for the year as a whole,” Bock said. “We had expected a slight rise.” BASF shares fell 2.8 percent to 69.97 euros at 2:30 p.m. in Frankfurt, giving the Germany company a market value of 64 billion euros while Bayer shares rose 1.8 percent to 95.29 euros. The difficult market conditions for crop sciences “increases the uncertainty” around the Bayer-Monsanto deal and the “appropriate price” that the Germany company should pay, Berenberg analysts said in a note published Wednesday.