Chemical Deals

Investor Ire Over Bayer's Monsanto Bid

bayer crop-bloomberg
The sheer size of Bayer’s agricultural division after a Monsanto takeover would overshadow the company’s pharmaceuticals and consumer health businesses in terms of revenue.
  • Why it matters

    Why it matters

    Purchasing Monsanto would be the largest acquisition in Bayer’s history, as well as the biggest deal ever done by a German company.

  • Facts

    Facts

    • Bayer’s new boss, Werner Baumann, took over as CEO from Marijn Dekkers in late April.
    • Monsanto is the world’s largest supplier of agricultural chemicals and seeds, with $15 billion (€13.4 billion) in sales.
    • Analysts estimate that acquiring Monsanto could drive Bayer’s debt levels past €70 billion.
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    Audio

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Just three weeks into his job as Bayer’s chief executive, Werner Baumann is making major waves – with an unsolicited offer to buy Monsanto, the global leader in agricultural chemicals and seeds.

The U.S. company’s managers are reviewing the the non-binding offer, but there is no guarantee of a deal. Neither company has specified a price tag, but it is estimated the deal could be worth more than €50 billion ($56 billion).

If Monsanto and regulators approve the acquisition, it would represent the biggest purchase in Bayer’s history –  and the biggest in Germany ever.

“The proposed combination would reinforce Bayer as a global innovation-driven life-science company with leadership positions in its core segments, and would create a leading integrated agriculture business,” Bayer said in a statement.

That business would surpass that of U.S. competitors Dow Chemical and Dupont, which are undertaking a tie-up.  Bayer’s own crop science business, which earned €10.4 billion in revenues last year, would grow to €24 billion, turning it into the largest division at the Leverkusen-based firm.

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But that big payoff wouldn’t come without big risks. The sheer size of Bayer’s agricultural division after a Monsanto takeover would overshadow the company’s pharmaceuticals and consumer health businesses in terms of revenue. And then there’s the bill for Monsanto. Paying for the acquisition would give the German chemicals giant little room for research and development via other buy-ups or alliances in its pharma arm.

Monsanto’s boss, Hugh Grant, could reject the offer, because he allegedly sees Monsanto as a purchaser, not as a firm to be purchased.

“Debt would be the biggest challenge in this takeover,” said Daniel Wendorff, a chemical industry expert at Commerzbank. If the deal were financed solely through loans, debt levels could theoretically rise to some €70 billion euros, which would likely force Bayer to raise new capital and hive off other parts of its business. It could also hurt the company’s credit rating.

Taken together, the two companies most recently generated €5.6 billion in free cash flow – but Bayer needs more than €2 billion of that amount to pay out dividends.

Moreover, it has yet to fully integrate its previous purchase of the consumer health firm Merck & Co, which cost Bayer some €11 billion. By late March, Bayer’s net debt load was already at more than €16 billion, with low interest rates complicating matters.

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Werner Baumann took over as CEO from Marijn Dekkers in late April. Source: Reuters

 

These concerns pushed shares to a two-and-a-half-year low on Thursday, with a drop of more than 8 percent to €88.51. Bayer also lost its title of the most valuable company on Germany’s blue-chip DAX index, pushed into fourth place by software-maker SAP, followed by engineering giant Siemens and Deutsche Telekom.

And because Bayer has yet to provide details of a possible deal, there is a good chance that stocks could remain under pressure in the short-term.

Sources close to the company told Handelsblatt that Bayer had considered buying Monsanto in the past, but that the company’s former chief executive, Mr. Dekkers, had always nixed the plans. The bid now comes as somewhat of a surprise, given that Mr. Baumann had promised to follow in his predecessor’s footsteps. “Don’t expect Bayer to develop in a different direction,” he said back in April.

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One of the reasons for Mr. Dekkers’ hesitation may well have been Monsanto’s mottled public image. As a producer of genetically-modified seeds and the herbicide Glyphosat – a possible carcinogen – the U.S. concern has faced criticism from environmental activists and regulators alike. It is also in the middle of a heated battle over whether Glyphosat should continue to be allowed into the European Union.

Monsanto’s problems, however, have made it a likely candidate for a takeover. The company had to slash its earnings forecast for the year, and it has also clashed with some of the world’s biggest commodity traders. Meanwhile, low crop prices have prompted farmers to order less, cutting into Monsanto’s revenues.

For the 2016 fiscal year, which ends in late August, revenue and profits are falling. In the six periods through the end of February, Monsanto’s income dropped 15 percent, and operating profits were nearly halved, coming in at just under €1.4 billion.

On top of that, sources in the chemicals sector said Monsanto may prove hesitant to agree to the deal. The company’s boss, Hugh Grant, could reject the offer, because he allegedly sees Monsanto as a purchaser, not as a firm to be purchased.

There are generally few opportunities for big acquisitions in the agricultural sector. But the business is on shakier footing of late, and it remains to be seen how the branch will develop in the future – and how long the current period of weak sales will last.

It’s unlikely that anti-trust regulators would derail the purchase, however. With revenues of €1.4 billion, Bayer’s seeds business is relatively small, but its agricultural chemicals division is more dominant. The opposite is true for Monsanto, whose only big crop protection product is Glyphosat. It is the leading producer of seeds, however, with more than €10 billion in sales.

“The market is consolidating, and both companies are supplementing their product portfolio and regional position,” said Ulrich Huwald, an analyst with Warburg Research. “A takeover of this scale is a challenging scenario for Bayer, however. And it doesn’t at all fit with the firm’s more conservative image.”

Some analysts suggest that Bayer should pay closer attention to the potential fallout a Monsanto purchase could have on its reputation. Greenpeace has accused the company, with its stringent patent protections and rules for farmers, of trying to bring global agriculture under its control.

“The intended deal shows that brand considerations focused on consumers are normally a low priority when it comes to mergers and acquisitions, said Torben Bo Hansen, the head of marketing agency Philipp and Keuntje.

Because of tight regulation of the crop protection sector, however, most players in the field see size as a key to their success.

 

Siegfried Hofmann writes about companies and markets for Handelsblatt. Maike Telgheder is an editor at Handelsblatt. Bert Fröndhoff, Katharina Schneider and Catrin Bialek also contributed to this report. To contact the authors: hofmann@handelsblatt.com and telgheder@handelsblatt.com.

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