Bayer Seals $66-billion Deal to Acquire Monsanto

The areas of potential synergies include soybeans, canola, and cotton seeds for the merged entity

b1German drug and crop chemical maker Bayer AG has struck a $66-billion deal to acquire U.S. seeds major Monsanto Company (NYSE: MON) on Wednesday, September 14th, 2016, which would make Bayer the world’s biggest agricultural supplier and enable it to take advantage of the converging pesticides and seeds markets. The takeover ends months of speculation and reinforces Bayer’s position as a life sciences company. It may be recalled that Bayer had made an unsolicited $42-billion takeover proposal to Monsanto on May 19th, 2016. However, Monsanto had rejected Bayer’s offer back then, stating it was too low.

The $128-a-share deal, higher than Bayer’s previous offer of $127.50 a share, marks the largest all-cash deal on record, ahead of brewing company InBev’s $60.4 billion offer for Anheuser-Busch in 2008. The potential Bayer-Monsanto deal, which is expected to close by the end of 2017, includes a $2-billion break-up fee that Bayer will pay to Monsanto should merger fail to get regulatory clearance.

Bayer’s new $128-a-share offer is a 44% premium to Monsanto’s share price on May 9th, 2016, the day before Bayer made its first written proposal. To fund the acquisition, Bayer plans to raise $19 billion by issuing convertible bonds and new shares to its existing shareholders; banks have also committed to provide $57 billion of bridge financing. Bayer’s proposed acquisition of Monsanto poses a win-win deal in a recent shakeout of the agribusiness sector driven by rapidly shifting weather patterns, intense competition in grain exports, and a slump in the global farm economy.

Deal could add burden Bayer’s finances

Investors feel that the takeover of Monsanto could add burden on Bayer’s finances. b2Conversely, 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 and 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. While its animal-health business could fetch $5 billion to $6 billion, the Covestro holding could be worth about 4.9 billion euros ($5.5 billion), as per industry estimates.

Antitrust woes

Source: The Wall Street Journal
Source: The Wall Street Journal

The proposed $66-billion Monsanto-Bayer deal would likely face U.S. antitrust hurdles because of an overlap in seeds business, particularly in soybeans, cotton and canola. The pending merger will also likely face an intense and lengthy regulatory process in the U.S., Canada, Brazil, the European Union and elsewhere. Hugh Grant, Monsanto’s CEO, said that both the companies will need to file in about 30 jurisdictions for the merger.

Consolidation in the agrochemicals industry

The proposed Bayer-Monsanto deal is the latest in a wave of mergers and acquisitions that have prompted a consolidation of the $100-billion global crop seeds and pesticides industry in the past 10 months. The deal comes after Monsanto’s futile attempt to buy Swiss pesticide giant Syngenta AG and the merger of The Dow Chemical Company (NYSE: DOW) and E. I. du Pont de Nemours and Company (NYSE: DD). Syngenta has since agreed in February 2016 to a $43-billion takeover by China National Chemical Corp., a state-owned entity that sells generic agricultural chemicals. More recently, on September 13th, 2016, Canadian fertilizer producers Potash Corp. of Saskatchewan Inc. and Agrium Inc. agreed to merge to get ahead of an industry slowdown. If all these deals close, only three companies would control nearly 70% of the world’s pesticide market and 80% of the U.S. corn-seed market!

Bayer seeking synergies

The Bayer-Monsanto merger is aimed at creating an integrated agriculture business for seeds, crop chemicals and online services to farmers. Moreover, Bayer is seeking more synergies from combining the development and sale of seeds and crop protection chemicals. Both companies are now looking to genetically engineer more robust plants and custom-build chemicals for those plants, with the aim to sell them together as a packaged deal. Bayer’s crop science division has businesses in seeds, crop protection, and non-agricultural pest control, potentially complementing Monsanto’s seeds assets. The areas of potential synergies include soybeans, canola and cotton seeds. Bayer’s share of the U.S. cotton seed market is 38.5%, while Monsanto’s is 31.2%. Bayer is ranked No. 2 in crop chemicals, with an 18% market share, while Monsanto dominates in seeds with a 26% market share. Bayer’s takeover would bring together major brands such as Roundup, Monsanto’s blockbuster herbicide, and Sivanto, Bayer’s new insecticide.

For Monsanto, the deal would bring it under a larger umbrella of brands, and would help it to better integrate its seeds business, and counter Chinese competition in the herbicides business. In its recent earnings release for Q3 FY16, Monsanto’s sales fell 8.5% to $4.19 billion owing to lower farmer spending amid weak agricultural commodity prices. Monsanto also has cause for worry as sales of its genetically modified soybeans, one of its biggest earners, fell by 17% and earnings tumbled 20% during Q3 FY16. Moreover, Monsanto is facing regulatory hurdles in its India operations that mandate the sharing of its technology with local seed companies.

Under the new leadership of Werner Baumann, who took over from Chief Executive Officer Marijn Dekkers in May 2016, Bayer has increased its focus on life sciences by buying Merck & Co. Inc.’s (NYSE: MRK) over-the-counter medicines business and divesting a stake in its plastics unit. It remains to be seen whether the proposed merger would unlock value and the next tranche of growth and opportunities for the two companies!

Stock Performance

b4Monsanto’s stock ended the day at $104.22, slipping 2.38%, at the close on Thursday, September 15th, 2016, having vacillated between an intraday high of $106.78 and a low of $103.94 during the session. The stock’s trading volume was at 10,616,114 for the day. The Company’s market cap was at $46.15 billion as of Thursday’s close.b5

Bayer’s stock ended the day, on the European markets, at €91.37, slipping 2.33%, at the close on Thursday, September 15th, 2016, having vacillated between an intraday high of $98.82 and a low of $86.98 during the session. The stock’s trading volume was at 4,672,868 for the day. The Company’s market cap was at €75.56 billion as of Thursday’s close.

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