Dow Chemical Deal With DuPont Could Be in Trouble

Agribusiness could be the same as health care in the eyes of lawmakers and Justice officials -- and that would spell big trouble for the proposed merger between Dow Chemical (DOW) and DuPont (DD) .

That risk may hit DuPont shares, but investors should know that Action Alerts PLUS holding Dow will be resilient if a deal breaks down. 

Last week, U.S. Sen. Chuck Grassley (R--Iowa) announced that the Senate Judiciary Committee will hold hearings on the consolidation of the agriculture industry -- or seed deals, as they are known. The hearing was scheduled in the wake of proposed mergers between DuPont and Dow; Monsanto (MON) and Bayer  (BAYRY)   ; and China National Chemical Company (ChemChina, for short) and Syngenta (SYT) in recent months.

"We're not permitting the sale of too much of our food industry, especially when government-controlled entities like ChemChina are the buyers," Grassley said in a May interview. However, the Treasury-led Committee on Foreign Investment in the U.S., or CFIUS, gave its approval for the merger last week in an apparent repudiation of Grassley's position.

But the CFIUS' opinion isn't binding, and neither is Grassley's Senate subcommittee's. The only opinion that matters is that of the U.S. Department of Justice.

The DOJ may have already tipped its hand on where it will go with its review of these agribusiness mergers. In June, the department's antitrust chief William Baer gave the keynote address at the American Antitrust Institute's annual conference.  

"At this moment, antitrust enforcers are reviewing two proposed mergers involving the country's largest health insurers and investigating major consolidation among large agricultural chemical and seed manufacturers, to cite a few examples. Especially in this environment, we cannot afford to let up our efforts," Baer told the conference.

Shortly after those comments, the business regulation arm of the executive branch department was busy filing lawsuits to block two proposed mergers between four health-insurance-industry companies. The DOJ cited competition concerns when it nixed Anthem's (ANTM) proposed $54 billion acquisition of Cigna (CI) , while also blocking Aetna's (AET) $37 billion proposed merger with Humana (HUM) .

If that decision was any indication, the agribusiness mergers currently on the docket may be in trouble. 

"Today, the industry is dominated by five large insurers commonly referred to as 'the big five,'" the DOJ said in the lawsuit. "In a scramble to become even bigger, four of the big five now propose to merge ... These mergers would reshape the industry, eliminating two innovative competitors -- Cigna and Humana -- at a time when the industry is experimenting with new ways to lower health-care costs."

The agribusiness sector is consolidating at a pace that puts it in the same vicinity as the health-insurance industry. Monsanto, for example, has spent nearly $12 billion since 1995 on 30 acquisitions. Syngenta has also made 30 purchases since 2000, totaling $2 billion.

Monsanto's proposed $45 billion acquisition of Syngenta in 2015 would have created an entity in control of 45% of the market, according to a Centre for Law, Economics and Society research paper.

It simply boils down to how many seed companies the DOJ considers too few. 

In the Dow/DuPont deal, the market is already pricing in some risk of the merger not being completed, with both stocks seeing a nominal rise since the deal announcement.

Wary investors should look to Dow over DuPont in case the deal is prohibited.

"We recognize that any merger of this size comes with regulatory risk, so we cannot rule out the possibility that the deal could be blocked. But we believe that Dow is set up for a large capital-deployment program should the deal have to be called off," said Action Alerts PLUS senior analyst Scott Berman in an email exchange.

Editor's Note: This article was originally published on Real Money at 12:15 p.m. on Aug. 31.

Employees of TheStreet are restricted from trading individual securities.

Action Alerts PLUS, which Cramer co-manages as a charitable trust, is long DOW.

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