Mergers & Acquisitions and Dow AgroSciences and Public Companies and Health Care & Life Sciences

If Dow AgroSciences sells, let's hope it's not to a rival

June 29, 2009

Private equity firms have a reputation as ruthless acquirers. They slash fat and jettison sluggish product lines, all in a quest to wring out higher profits and grow the parts of the business with the most potential.

For Indianapolis-based Dow AgroSciences—or at least for its 1,200 local employees—a buyer like that would be a godsend.

That's because the alternative could be catastrophic. Investment bankers and analysts say that if a competitor scooped up the agricultural-products powerhouse, it would look to lop off overlapping operations at the combined company.

That could mean elimination of hundreds or thousands of jobs at Dow AgroSciences, which employs 5,400 worldwide. Those are coveted, highpaying positions. Half of the Indianapolis workers, for instance, are in research and development.

"If we were going to wish for something, we would probably wish for it to be acquired by private equity players," said Ronald Meeusen, a former Dow AgroSciences executive who spent six years as the company's global leader of plant genetics and biotechnology R&D.

That's if parent company Dow decides—in response to a torrent of interest from potential buyers—to sell the business at all. To Meeusen, and the former colleagues he keeps in touch with, the most attractive scenario would be for Dow to tell suitors, "Thanks, but no thanks."

"There has been anxiety about it" within Dow AgroSciences, said Meeusen, who left the company in 2006 and now serves as managing partner of the Carmel-based MidPoint Food & Ag Fund.

"However, that anxiety is tempered by the fact that Dow AgroSciences has been on a roll the last five or six years and contributed a tremendous amount of cash to the Dow parent company."

On top of that, he said, Dow AgroSciences fits perfectly with Dow CEO Andrew Liveris' strategy of moving away from low-margin, high-volume chemicals and into more lucrative specialty products.

Successful transition

Dow AgroSciences is a textbook example of that successful evolution. The company long has produced commodities like pesticides and herbicides, but in recent years increasingly has concentrated on biotechnology, using genetics to create plant vaccines and new strains of seeds.

The strategy has been wildly successful. Revenue last year rose 20 percent, to $4.5 billion, and operating profit climbed 36 percent, to $761 million.

"I will say unequivocally that Dow is going to be very reluctant to sell Dow AgroSciences," Meeusen said.

The problem is that, as CEO of a public company, Liveris has a duty to shareholders to consider attractive offers, and the company likely will receive some doozies. Analysts say the business would fetch at least $7 billion and perhaps a lot more.

Potential buyers have been circling since February, when Liveris expressed concern that his struggling company might need to sell the subsidiary to raise cash.

The next month, after Dow regained its financial footing, Liveris said: "We've designed a structure where we can control our destiny, rather than be forced to fire-sale. More critically, we can retain key assets like Dow AgroSciences."

'Strong interest'

But once you throw a company into play, it's difficult to call off the suitors. Liveris seemed to acknowledge as much during a conference call April 30, the day the company announced it was considering selling a stake in the business, selling it outright, or spinning it off through an initial public offering.

"This business is strategic to Dow, but given the current market for assets in the agricultural space, we have launched a rigorous evaluation process," he told analysts on the call.

At the company's annual meeting two weeks later, he said Dow AgroSciences was receiving "strong interest" from suitors.

According to analysts and news reports, potential buyers include Basel, Switzerland-based Syngenta as well as China National Chemical Corp., that nation's leading chemical producer.

A private equity buyout also is a possibility, though deal-making in that sector has slowed dramatically since credit markets seized up.

Private equity suitors?

Private equity firms used to be able to make purchases with as little as 10-percent equity, but lenders now are requiring equity of as much as 60 percent, said Joe Broecker, senior managing director of Periculum Capital Co. in Indianapolis.

"I wouldn't rule out private equity in a potential Dow transaction," he said. "But there are probably only 10 or 20 firms that are large enough to execute it. It probably would be in syndication form, with two or three firms participating."

The suspense will end soon. Liveris said on April 30 that Dow expected to decide what to do with Dow AgroSciences within 90 days.

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