Bayer Eyeing Top Place in $42-billion Monsanto Buyout Bid

High inventories and low commodity prices spur consolidation in global agrichemicals industry

German drugs and chemicals group Bayer AG has made an unsolicited takeover proposal to U.S. seeds major Monsanto Company (NYSE: MON) on May 19th, 2016, in a move that could make it the biggest supplier of farm chemicals. This strategic step will reinforce its position as a life sciences company. If the deal goes through, Bayer would emerge as the world’s biggest agricultural supplier and take advantage of the converging pesticides and seeds markets. Monsanto, which has a market value of $42 billion as per Bloomberg data, stated that it is reviewing the offer, which is subject to due diligence, regulatory approvals and other conditions.

The proposal, which could trigger a major shakeout in the global agrochemicals industry, comes after Monsanto’s futile attempt to buy Swiss company Syngenta AG and the proposed merger of The Dow Chemical Company (NYSE: DOW) and E. I. du Pont de Nemours and Company (NYSE: DD). According to Bloomberg, shares of Bayer plunged amid concern that a large purchase would weigh on its credit rating and force the company to sell more stock.

Source: Bloomberg
Source: Bloomberg

If Bayer succeeds in buying Monsanto, it could be the biggest acquisition globally for 2016 and the largest German deal ever, as per Bloomberg. Investors feel that the takeover of Monsanto could add burden on Bayer’s finances. Conversely, analysts say that the deal could auger well for Bayer since the Company’s main business would shift to agriculture, accounting for about 55% of core earnings, up from roughly 28% last year, excluding the Covestro chemicals business that Bayer plans to sell.

To help finance the deal, Bayer is considering disposing of its animal-health business and the remaining 69% stake in plastics business Covestro AG. Its animal-health business could fetch $5 billion to $6 billion, and the Covestro holding is worth about 4.9 billion euros ($5.5 billion.

Bayer seeking synergies

Bayer, with its market value of $90 billion, is seeking more synergies from combining the development and sale of seeds and crop protection chemicals. Hence, the merger is aimed at creating an integrated agriculture business. Agrichemical companies are now looking to genetically engineering more robust plants and custom-build chemicals for those plants, to sell them together as a packaged deal.

Bayer, the inventor of aspirin and maker of Yasmin birth control pills, is a diversified holding with products including cancer drugs, flea and tick collars for pets and Coppertone sunscreen. Bayer’s crop science division has businesses in seeds, crop protection and non-agricultural pest control, potentially complementing Monsanto’s seeds assets. Bayer’s takeover would bring together major brands such as Roundup, Monsanto’s blockbuster herbicide, and Sivanto, a new Bayer insecticide.

Antitrust woes

The $42-billion Monsanto deal would likely face U.S. antitrust hurdles because of an overlap in seeds business, particularly in soybeans, cotton and canola. Recently, ChemChina’s deal for Syngenta faced regulatory review in the U.S. over concerns about the security of U.S. food supply.

Consolidation in the offing

Monsanto approached Bayer earlier this year expressing interest in the latter’s crop science unit, for an acquisition or joint venture, as per Reuters. Bayer is ranked No. 2 in crop chemicals, with an 18% market share. Monsanto dominates in seeds with a 26% market share. A Bayer-Monsanto deal would result in a major consolidation and reduce the number of major players in seeds and pesticides to four from six.

Under the new leadership of Werner Baumann, who took over from Chief Executive Officer Marijn Dekkers this month, Bayer has increased its focus on life sciences by buying Merck & Co.’s over-the-counter medicines business and divesting a stake in its plastics unit. It remains to be seen if the bold strategies of the new captain at helm will strengthen the group!

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