Deals Boom In Off-Patent Ag Chemicals

Upstart chemical company Platform Specialty Products has signed an agreement to buy Arysta LifeScience, an agricultural chemicals formulator, for $3.5 billion from the private equity firm Pemira. The purchase is one of several recent deals that are reshaping the second tier of the agrochemicals business.

Arysta was fashioned in the early 2000s from the agricultural chemicals interests of two Japanese trading firms, Tomen and Nichimen. Pemira acquired it in 2008 for $2.9 billion.

With about 1,300 employees, Arysta had 2013 sales of $1.5 billion, 75% of which were from off-patent products. The firm’s portfolio includes insecticides, herbicides, fungicides, and biostimulants.

Arysta is the third and largest of three recent agricultural chemicals acquisitions for Platform. When they are completed, Platform will have an agchem unit with annual sales of nearly $2.2 billion, making it a top 10 player. In a call with investors, Platform CEO Daniel H. Leever said his firm will be “one of the leading niche-based global” players in the $80 billion-a-year agchem market.

Investor Martin E. Franklin started Platform in early 2013 with nearly $900 million in financing. In October of that year, Platform made its first purchase, buying specialty chemical maker MacDermid for $1.8 billion. It has since targeted high-growth specialty chemical companies that have a modest manufacturing footprint.

Leever said Platform continues to be on the lookout for businesses in areas including water treatment and flavors and fragrances. “There are hundreds of attractive candidates we can pursue,” he told investors.

Arysta fits Platform’s “asset-light, high-touch” business model, Leever said. The firm doesn’t manufacture active ingredients, sourcing them instead from more than 100 suppliers. It also doesn’t conduct active ingredient R&D. According to a prospectus filed in September when Pemira was testing the market for an initial public offering, Arysta licenses and acquires ingredients from third parties to minimize risks and costs.

About 40% of Arysta’s sales are in the fast-growing markets of South America, said Wayne Hewett, Arysta’s CEO, who participated in the call with investors and will head Platform’s ag operations. In addition, the firm has significant positions in other developing regions including Asia, Eastern Europe, and Africa, he said.

With its three acquisitions, Platform is helping consolidate the second tier of the crop protection business, which is focused mainly on off-patent agrochemical ingredients. Similar deals this year include FMC’s purchase of Cheminova and Adama’s buy of ChemChina’s agricultural chemicals. All the transactions target growers in the developing world, notes Gautam Sirur, principal consultant at Cropnosis, a Scottish crop protection consulting firm.

The consolidation strategy is sound, Sirur notes, but Platform “paid a lot for a marketing organization that was losing money.” Arysta had a net loss of $93 million in 2013 on sales of $1.5 billion. In 2012 it posted a loss of $152 million on similar sales, according to the prospectus.

The losses notwithstanding, Arysta’s strategy to outsource active ingredient production to third parties, mostly in India and China, is the wave of the future, Sirur says. For instance, Syngenta, the largest crop protection chemical company, outsources manufacturing of about 60% of the chemicals it sells, mostly off-patent products, to third parties.

Other majors such as DuPont are starting to do the same, according to Sirur. Although Bayer, BASF, Dow Chemical, and Sumitomo Chemical still largely make their own chemicals, Sirur suggests that the largest crop chemical firms will ultimately look to outsource active ingredient production to lower-cost third parties.