Bad chemistry

Regulators stall Bayer-Monsanto megamerger

Fruit And Vegetable Seed Production Inside Monsanto Co. Seed Valley Greenhouses
It's a regulatory jungle out there. Source: Bloomberg

Agricultural and chemicals giant Bayer’s bid to buy the US seedmaker Monsanto was going so well.

First of all, financing proved smoother and less expensive than observers expected. The euro rise against the dollar since the deal was first announced in 2016 means Monsanto could cost €6 billion less than originally thought: The price tag will now be closer to €52 billion ($63 billion), rather than €58 billion. This means Bayer’s expected capital hike will be much smaller than once expected– probably €5 billion, in place of €12 billion.

And on Thursday, Bayer sold a further tranche of shares in Covestro, its spun-off material sciences division, raising €1.8 billion, and relieving Bayer of billions more in pension and other obligations. These and other sales may soon give the German company a net positive cash balance of around €5 billion.

But the smoothness of the financing contrasts sharply with the hurdles thrown up by regulators, which are considerably slowing progress and mean the deal may not be finalized until the middle of 2018. The initial target date has already passed.

The EU – concerned with avoiding monopolies in seeds and pesticides – is making the toughest demands.

Of the 30 relevant regulatory authorities worldwide, around half have already approved the megamerger. However, the most important ones – such as the European Union, the United States and Brazil – have yet to rule on it. The sale of Covestro is seen as Bayer’s gesture to regulators, meant to demonstrate its seriousness in assuaging anti-trust concerns. But it is likely the company will have to sell off all remaining seed-related activities.

Bayer CEO Werner Baumann knew the deal would be no walk in the park. He has compared it to climbing a mountain – a steep and exhausting route, where the summit is not always visible – and has acknowledged that competition authorities have dug more into the details than he ever imagined. So far the company has submitted over 4 million pages of documents for inspection.

The EU, which is concerned with avoiding monopolies in seeds and pesticides, is making the toughest demands. It also wants to make sure that research does not suffer as a result of the merger; this was also a critical issue in their ruling on the merger of US chemical firms Dupont and Dow Chemical last year. Bayer already reacted to the EU’s concerns by selling off large swathes of its seed and herbicide business to rival BASF, including research facilities, in recent months.

Experts say this may not be enough. Analysts at Bernstein Research expect Bayer to sell off, more or less, its entire remaining seed interests, probably worth around €500 million. BASF is expected to bid again, along with Syngenta and the US firm FMC.

The European Commission may also ask Bayer to look closely at its data-driven and digital farming divisions, which use computers to precisely control water and pesticide usage, since Monsanto also has a powerful position in that market.

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Elsewhere in the world, the regulatory hurdles are also mounting. Bayer cleared the first American hurdle, with authorities raising no objections on security grounds. But now the proposed merger is being put under the scrutiny of the Department of Justice, working closely with its European counterparts. All authorities agree that the deal raises complex technical and commercial issues. Brazilian competition authorities recently announced a three-month delay in their decision, now due to be announced March 20.

Yet it may all simply be a matter of time. Experts agree that the merger is likely to be approved, with the German company prepared to make any moves necessary to push the deal through. Bernstein analyst Jeremy Redenius puts the likelihood of success at 80 percent.

The question is if there is a limit beyond which Bayer is not prepared to go. In the merger contract, it committed to selling off businesses with revenues of $1.6 billion if necessary. The sale to BASF has already exceeded this total. However, sources within the company suggest it is prepared to be flexible in order to shepherd through the deal. If the merger were to fall through, Bayer agreed to pay Monsanto a penalty fee of €2 billion, surely incentivizing the Germans to make more concessions.

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

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