In January 2019, Verdant Partners released its annual Agribusiness M&A and Investment Review
which featured summaries of observations and expectations for key trends in agribusiness sector. Over the course of the year, Verdant will provide full reports on several of those summarized topics.
Below is the summary of viewpoints from Verdant Partners’ experts on Global Agribusiness M&A Outlook in 2019.
Despite the significantly diminished profitability facing row crop agriculture producers for the past several years, the agribusiness industry continues to be a highly-visible and desirable target for investors. While the much of the rest of the world suffered through the Great Recession, agriculture was one of the few industries that was largely unaffected by that crisis. During this time, the investment community took notice. As a result, private equity and venture capital has developed a newfound interest in agriculture as an investment opportunity. Ag is seen to be stable with compelling growth opportunities fueled by new technology and changing consumer habits, including these notable trends:
1. Consumer demand for fresh and healthy foods has increased the appetite for the acquisition of produce companies and for the vegetable seed companies that are responsible for the production of fresh vegetables;
2. Ag-Tech is an area of expansion with great hope for the future of farming; and
3. Medical cannabis is a fast-growing area that has captured the interest of the financial community.
Compared to the major consolidation events in 2016 and 2017, this past year could be considered relatively calm. Multinationals have reshuffled and are in the process of developing new strategies for the near and long-term, while regional businesses have capitalized on customer-facing opportunities amidst the distraction of new alliances. While commodity markets have been dismal, increased farm productivity continues to take place.
Investments in certain segments of agriculture remained active, notably for participants in vegetable seeds, fresh produce, precision agriculture, and biotechnology. During 2018, over 60% of crop agriculture M&A transactions involved companies that are categorized in these four broad segments. This trend is expected to continue in 2019, especially in vegetables and fresh produce where consumer preference and improving median incomes will drive fresh market purchasing decisions.
In Verdant’s view, the agricultural market remains poised for continued consolidation as strategic participants seek improved efficiencies, more robust technology, and a stronger and more diverse geographical presence. The vast majority of agricultural companies are fortunate to have strong balance sheets with investable cash and an appetite to build on strengths and fill in voids. Additionally, financial investors look for attractive and stable returns in a segment that is now considered to be less risky and more viable than pre-recession days.
Following upon one of the most substantial reorganizations the crop input industry has ever experienced, multinationals will have a better understanding of their new partners, products, and markets, and will look to explore new opportunities to bolster growth, largely through acquisition. Small to mid-size companies with unique offerings, reputable brands, solid profitability, and sound management teams are likely to see premiums paid. This will be especially relevant globally as trade turmoil settles and economic globalization continues.
In spite of much talk about low commodity prices, tariffs, GMOs, and other concerns, there is reason for a high level of optimism for agriculture. We are fortunate to participate in a great and expanding industry with a bright long-term future.
The following excerpts provide a brief glimpse into some of the target markets and segments the Verdant team follows. Stay tuned for more descript overviews of each in the coming weeks.
The AgTechnology market consists of an abundance of innovative startups and early stage companies attempting to improve efficiencies and profitability for producers. Agribusinesses across the entire value chain continue to emphasize the significance of digital agriculture and are seeking novel solutions to capitalize on everchanging farmer demands. In order to fast-track market penetration, many strategic agribusinesses are turning to acquisitions to build digital offerings in lieu of developing internal solutions. I predict that the coming year will be active with consolidation as agribusinesses build and bolster digital solutions via acquisition from a crowded field of startups supported by anxious investors
Microbiome Products for Ag
A focus on discovery and development of the full potential of microorganisms, collectively known as the microbiome, has become a priority for many agricultural companies. The enormous potential in the new ag-microbiome markets has expanded investment in research to eventually capitalize on these opportunities. However, excellence in R&D without relevant commercial knowledge, including the size of target markets, the economics of production for live biological products, the complexities of distribution systems, and the cost of negotiating regulatory pathways, is a recipe for scientific success and commercial failure. Only those companies that understand these challenges will have success in the market. The most likely survivors will offer a diverse product array, based on more than one microbial species, and internal proprietary technology augmented by licensing and M&A.
Hybrid Wheat & Ukraine
Approximately 600 million acres of wheat are planted globally compared to corn at roughly 470 million acres. That said, wheat planting is mostly from saved seed, especially in underdeveloped major markets. The wheat seed market has the potential to be extremely valuable if hybrids could demonstrate strong returns to the farmer, but there haven’t been quality results to build this market to date. Continued investments, notable from Syngenta and Bayer (now BASF), may show results in this segment in 2019. Meanwhile, continued growth and evolution are expected in the Ukraine in 2019. With approximately 33 million arable hectares (82 million acres) of extremely fertile soils and a small rural population, it is only a matter of time until Ukraine will exploit its resources to feed Europe whilst North and South America look after the other populous areas of the globe as well as themselves.
From shifting consumer dynamics to increases in the cost to grow and food safety concerns, there has never been another time in fresh produce where there is such an abundance of change. Retail consolidation is reshuffling, requiring revised goto-market strategies, while fresh produce companies face the increasing need to differentiate and streamline their supply chains. To achieve these goals, there is significant interest from investors outside the industry to capitalize on this rapid evolution. Additionally, continued regionalization of urban warehouse and greenhouse developments across the United States will remain. We predict that several sectors of fresh produce, including processing / wholesaling operations and regional vegetable players, will consolidate in the coming year to bolster competitiveness and efficiency.
Three significant developments / trends were apparent in the global vegetable seeds sector during 2018: 1) regulators’ decisions concerning the Nunhems divestment, as a whole, resulted in less opportunity for competitors to pick up valuable species / programs; 2) general market slowdown was observed but may be an extraordinary result of the trade war in the global market; and 3) the increasing complexity of the phytosanitary regulations is challenging international seed movement and trade. These challenges and concerns will certainly be felt in 2019 and will lead to continued consolidation in the market.
With vast land availability, rich water resources, and a relatively small population, the South American continent will remain a critical and growing region for agriculture in 2019. We foresee continued growth for competitive enterprises involved in the biological inputs, genetics, commodity row crop, niche tree crop, and produce markets. Limited capital availability in South America remains a challenge for small-medium size companies, with capital needs ranging from R&D funding to incremental working capital to support growth and investment projects, namely processing facilities. Financial and strategic businesses that utilize a local approach and a professional search process will benefit considerably from the unique investment opportunities in the region.
Considerable M&A activity in floriculture breeding took place in 2018, despite the diminished acquisition pace of Dümmen Orange. Acquisitions made by PanAmerican Seed, Syngenta Flowers, Sakata Ornamental, Beekenkamp Plant, and Nimbus, amongst others, helped keep activity in floriculture high. Although for some time to come independent family businesses will remain that focus on one or a limited number of crops, consolidation in the floriculture industry is expected to continue. Drivers are the need for accessing new breeding technologies, succession issues in family-owned businesses, and the need for economies of scale.
Representation & Warranties Insurance
Representations & Warranties insurance coverage is available to cover breaches of representations and warranties statements made by the seller in a purchase agreement. Sellers are usually required to indemnify the buyer for breaches of the representations and warranties made in the purchase and sale agreement and often required to hold some level of transaction proceeds in escrow or through a holdback to ensure that funds are available in the event of a breach. Representations & Warranties insurance is intended to supplement or even replace seller indemnity obligations by insuring most or all of the representations made within the purchase agreement. The popularity of this insurance has increased significantly due to its ability to reduce or replace the seller's indemnification or escrow requirements. I expect to see an increased use of such coverage, even for small to medium sized transactions.
Download 2018 report here:Agribusiness M&A and Investment Review 2018