Agricultural Chemistry

Bayer Turns Screws on Monsanto

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The seed industry is experiencing a global slowdown.
  • Why it matters

    Why it matters

    Agricultural chemistry companies have been adversely affected by a slowdown in key agricultural regions. Monsanto has been worst affected, leaving Bayer in a strong position.

  • Facts

    Facts

    • A Bayer acquisition of Monsanto would be the third megadeal in the agricultural sector in just a few months.
    • It follows the merger of Dow and Dupont in the United States, and the takeover of Swiss firm Syngenta by ChemChina.
    • Monsanto has repeatedly rejected Bayer’s offers, apparently holding out for a higher price.
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    Audio

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Hugh Grant’s plan was simple. In order to stave off a takeover bid from German chemicals giant Bayer, the boss of U.S. seed producer Monsanto put it about earlier this month that his firm could acquire the agricultural chemistry division of BASF, another German rival.

But that theoretical plan was scotched yesterday when BASF chief executive Kurt Bock clearly rejected the speculation that his company planned to sell its ag-chem unit. “I believe we have already made it very clear that our crop protection business is not for sale,” he said.

This is an inauspicious signal for Mr. Grant, who opposes a takeover offer from Bayer. He has now lost his key leverage tool.

A Monsanto takeover by Bayer would be the third megadeal in agricultural chemistry in just a few months. It would follow the merger of U.S. firms Dow Chemical and Dupont, as well as the purchase of Swiss seed maker Syngenta by Chemchina.

At the beginning of July, Bayer, based in Leverkusen in western Germany, raised its offer from $122 to $125 per share, which would amount to a total price of $64 billion (€58 billion). Monsanto rejects this offer, calling it “financially inadequate,” and is holding out for an even higher price.

Bayer has cleverly launched its attempt to acquire Monsanto during a weak phase in the agricultural chemistry industry.

Talks between the companies are apparently continuing. Bayer chief Werner Baumann was unwilling to relinquish any information on the status of the talks yesterday. “At this time, we have nothing to announce beyond what was already said,” he told analysts in a teleconference on the company’s quarterly figures.

The companies are negotiating a confidentiality agreement intended to give Bayer access to Monsanto’s accounts. This due diligence period could be followed by an increase in the offer. It is unclear where the companies stand in this current game of poker.

What is clear is that Bayer has cleverly launched its attempt to acquire Monsanto during a weak phase in the agricultural chemistry industry, as evidenced by the latest quarterly figures. In the first six months, the top players in the industry saw sales decline by an average of 7 percent, while operating earnings were 11 percent lower than in the previous year.

Monsanto has the biggest problems. With a 20-percent decline in earnings, it was the most severely affected by the cyclical low in the agricultural sector.

All manufacturers face the same challenges. In key regions such as the United States and Latin America, farmers have been slow to place orders. Their incomes are shrinking because grain prices are declining. Although the price of soybeans has recovered somewhat recently, it is still 30 percent lower than its high in early 2014. A similar situation applies to wheat and corn.

On the whole, the market is apparently developing more weakly than was already expected. “The conditions in agricultural chemistry remain challenging,” said James Collins, head of the agricultural division at Dupont. So far, Dupont has been the only industry player to report a slight increase in profits.

Monsanto, Bayer and BASF, however, have had to revise their forecasts for agricultural chemistry downward. Results for the entire year could be somewhat lower than expected, said BASF’s Mr. Bock. Bayer is now assuming a slight decline in profits instead of a slight increase.

On the whole, however, the two German companies are doing better in the sector than their two major competitors, Syngenta and Monsanto. Bayer benefits from its relatively strong position in the Asia-Pacific region, where its sales increased by 8 percent. Sales of seeds and fungicides have been particularly strong in China and Australia, which has somewhat offset the problems in the United States and Latin America.

Relatively strong sales of fungicides in China and the United States have helped BASF cushion losses elsewhere.

Monsanto, on the other hand, has suffered substantial losses, especially in sales of its controversial weed-killer glyphosate, which accounts for close to a third of corporate sales. The operating profit in this segment shrank by more than half in the last quarter, while seed earnings remained virtually stable.

For this reason, the U.S. company had to revise its prognosis for the entire year slightly downward. It currently assumes almost a 40-percent drop in profits. But profits are then expected to increase again starting in 2017, and then increase by about 15 percent a year in the following years.

Investors anticipated the slowdown in Monsanto’s agricultural chemical business early on. In July 2014, the firm’s shares were trading at $125, or about the same price as Bayer shares are trading at today. The weakness in the market that began about a year later brought the share price down to between $95 and $90, which enabled Bayer to make its play.

On Wednesday, the stock was trading at $106 a share.

 

Siegfried Hofmann is Handelsblatt’s chemical and pharmaceutical industries correspondent. Bert-Friedrich Fröndhoff leads a team of reporters that covers the chemicals, healthcare and services industries. To contact the authors: hofmann@handelsblatt.com, froendhoff@handelsblatt.com

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