For four months Werner Baumann and Hugh Grant worked around the clock until, at long last, negotiations were finally concluded last week between the Bayer chief executive and his counterpart at Monsanto.
In the end, Bayer agrees to pay $66 billion (€59 billion) to acquire the world’s largest producer of seeds and pesticides. But the hard work for Mr. Baumann doesn’t end there. There will be plenty more tough negotiations ahead with antitrust authorities and investors before he can complete his mega-fusion.
The two firms have already been in talks with competition authorities in 20 countries. Bankers aren’t expecting a final decision on the deal until March 2017 at the earliest. Only after that will Bayer begin to refinance the acquisition with a planned capital increase of $19 billion and the sale of new bonds.
Those in finance circles estimate Leverkusen-based Bayer will likely sell bonds totaling more than $25 billion to secure long-term loans with banks.
There are significant overlaps in the seed businesses of Bayer and Monsanto.
For Markus Manns, portfolio manager with Union Investment, it seems “that there will be antitrust trouble” with the United States.” Other investment bankers don’t think the road will be problem-free for the acquisition.
Nevertheless, they are hoping the hook-up will be approved in the end, though not for entirely altruistic reasons. Banks can still do good business not only by consulting on mergers, but by selling new stock shares and bonds.
Standard & Poor's, Moody's and Fitch have already placed Bayer’s ratings on the watchlist. Their prognosis is that the outlook is negative.
Merger consultants at Bank of America, Merrill Lynch and Credit Suisse, along with HSBC, Goldman Sachs and JPMorgan, have already given Bayer bridge financing of $57 billion for the acquisition.
That, according to bankers, will be repaid in just under one year.
Bayer will pay a rate of approximately one-half of 1 percent for the first six months, though the rate would increase during an extension. This transaction came to the banks at just the right time, because with bridge loans, they can make money without putting too much strain on their own capital.
The credit may only be used during the bridge period.
Then it will be replaced by Bayer’s sale of new stock shares and bonds.
“However, both will work only if the antitrust authorities approve the acquisition in the United States and Europe,” according to those in banking circles.
It seems certain the first step towards raising new capital on the stock market will be through refinancing. Bayer wants to raise $19 billion through the sale of new stock shares to existing shareholders in a capital increase.
The amount sought by Bayer would be the most ever attempted by a German company.
The capital increase is expected to be a big challenge for Bayer, whose shares have fallen about 10 percent since it announced its bid for Monsanto in May.
It is customary to price new shares in a capital increase at a discount of 20 percent or more to the current share price to attract investors.
A small portion of the capital increase of a few billion euros is also meant to come from a mandatory convertible bond, where investors get their money back at a specific time, not in cash, but in shares of Bayer.
The exchange rate will be determined at the time of the conversion.
Some bankers are confident. “Bayer won’t risk going to the bond market until its capital increase has gone through,” said one, who declined to be named.
With more capital improving its financial ratio, Bayer’s credit rating should also improve. Even so, rating agencies are nevertheless likely to downgrade Bayer’s creditworthiness as it takes on new debt to finance the sale.
The acquisition will balloon Bayer’s net debt to 1.6 times to more than 4 times its earnings before interest, taxes, depreciation and amortization. Standard & Poor’s, Moody’s and Fitch have already placed Bayer’s ratings on watchlists.
Their outlook is negative. Bayer still maintains the seventh-best rating of A- or A3 with S&P and Moody’s, which is essentially good credit. Fitch assigned Bayer an an ‘A.’ S&P has already announced that its rating is likely to fall a maximum of two notches to “BBB,” an average credit standing.
Bayer would still be two steps from junk status. Bank analysts such as Timothy Rea from BNP Paribas expect Bayer’s ratings will not fall below “BBB.”
The price of Bayer bonds initially fell in May after it announced its Monsanto bid, and its bond yields rose accordingly. Since then, however, this has changed. Now yields on Bayer’s seven-year bonds, its longest-term conventional corporate bond, are just 0.4 percent.
Yields for one-year bonds have even slipped slightly into the negative due to the increased rates. Investors who purchase such bonds now will lose 0.05 percent when the bond matures, despite interest payments.
The Bayer bonds do not yet reflect the ratings downgrades, according to the unanimous opinion of analysts. “BBB” rated euro bonds for an average maturity of six years yield currently about 0.8 percent.
One reason for Bayer’s low yields is the European Central Bank. In June, it bought not only government bonds but corporate bonds and has since snapped up Bayer’s four outstanding senior euro bonds.
With its bond purchase program, meant to sustain the euro zone’s flagging economy, the ECB wants to boost lending, the economy and, hopefully, inflation. Bayer is benefiting under this regime.
But Bayer can’t increase its capital base with bonds with negative returns. Bayer must issue new bonds with a higher yield than its outstanding bonds, according to Markus Rohleder, a credit analyst at DZ Bank in Frankfurt. Like many other analysts, he said Bayer bonds were underweight.
One challenge is the ECB plans to end its bond purchase program next March. If the central bank goes through with that plan, rates are likely to fall across the market and tighten yields further.
The same would likely be true if the US central bank raises its key interest rate. Bayer could be affected by both banks’ decisions because bankers are firmly convinced Bayer will also sell new bonds in dollars.
These pay out around 1.5 percentage points more on average than their euro counterparts, however. That would let Bayer save on currency conversion costs, because ultimately Monsanto will be purchased in dollars.
Already looking ahead, Bayer launched a program for the sale of US dollar bonds in 2014.
One risk of the Monsanto acquisition would be if the capital market interest rates don’t increase from their current low levels.
“The refinancing costs,” said one investment banker, “are the least of what Bayer should be worried about.”
Robert Landgraf is Handelsblatt’s chief correspondent for the financial markets; Siegfried Hofmann is Handelsblatt’s chemical and pharmaceutical industries correspondent; and Andrea Cünnen writes about financial markets and investment. To contact the authors: firstname.lastname@example.org and email@example.com and firstname.lastname@example.org