The stock fell yesterday following rumors in the Wall Street Journal of a possible separation of the seed (57% of revenue) and crop protection (43%) businesses. The scenario pits two interpretations of the case against each other: that of supporters of a conglomerate integrated by R&D and commercial synergies, and that of investors who see the split as a lever for "unlocking" multiples.
It is clear that these two points of view are indeed opposed, insofar as the group's growth has remained modest since its IPO, which argues for a split, while the stock has nevertheless tripled over the period, which is an argument in favor of a status quo.
However, the current period is crucial for the crop protection division. The market is being shaken up by pressure from low-cost Asian generics, shifts in public opinion against pesticides, and precision farming, which reduces the volumes applied. Added to this explosive cocktail are the potential legal risks associated with crop protection products, illustrated by the billions paid by Bayer in the cases involving its subsidiary Monsanto and the catastrophic herbicide RoundUp.
Corteva is resisting so well largely thanks to its seeds business. The division has grown steadily since the IPO, while crop protection products have seen declining revenues over the last two fiscal years.
Therefore, it seems that if a spin-off is to take place, now may be the right time. The operational and stockmarket context is favorable. During the last earnings presentation, targets were raised and both segments demonstrated their resilience. Seeds are benefiting from an increase in corn acreage and market share gains in North America, as well as higher prices. Crop protection has benefited from demand for spinosyns (insecticides), the biocontrol product range in North America, and growth in Latin America.
The separation of activities does not appear to be a last resort. However, a split could weaken both entities by breaking synergies. On this point, the various brokers following the case are at odds with each other. Bank of America believes that the split "has no obvious strategic or financial merit," while Deutsche Bank believes that a transaction could unlock "substantial" value, particularly for the seeds division, whose valuation could approach that of its peers.
What all investors seem to agree on at present is that a separation is not without financial logic. However, it is only justified if the expected increase in valuation from such a transaction offsets the cost of losing current synergies (R&D, production, distribution, etc.) and provided that the improvement in cash flows is not undermined by the costs and complications associated with the split.
