No Covestro disposals needed to fund Bayer’s Monsanto takeover

(releads, adds company’s comment on Covestro divestment, Monsanto acquisition, Crop Science Q3 results)

LONDON (ICIS)–Flotation of additional stakes in Covestro are not necessary for Bayer to fund the acquisition of Monsanto, a spokesperson for the Germany-headquartered agrochemicals and pharma producer said on Wednesday.

Bayer’s former materials science division Covestro – in which it still owns a stake of around 64% – published its third-quarter results on 25 October, with net profit rocketing by 62% year on year, although sales stood flat.

While Covestro’s share price has doubled since its listing in October 2015, European chemical equity analysts have warned the company’s first-year positive performance as a public company may be drawing to a close as tailwinds coming from foreign exchange and low raw materials costs come to an end.

On that basis, the analysts added they were sure Bayer will soon take advantage of the stock’s high price and divest its stake to top up financing for Monsanto, the US agrochemicals major the German company wants to acquire for $66bn.

Bayer, however, continues to say the divestment will occur in the mid-term rather than immediately, arguing the financing for Monsanto would not depend on that specific divestment.  

Bayer said on 12 October it had secured $56.9bn in bank financing for the transaction.

“The decision to divest Covestro was taken far before the decision to acquire Monsanto was made. Whatever people say, our statement was that no disposal is necessary to finance Monsanto,” said a Bayer spokesman on Wednesday.

“For financing [the Monsanto acquisition] we are using capital market instruments, and if we divest [Covestro] it will be on the back of strategic reasons.”

The spokesman said the current market value of Covestro stands between €10bn and €12bn. As per Bayer’s 64% stake, the parent company could get proceeds of between €6.4bn and €7.7bn ($7bn-$8.4bn).

On the acquisition itself, and how it has prompted concerns about the size of the resulting company post-transaction, the spokesman said Bayer is confident the concerns will be overcome and the transaction will go ahead.

US farmers’ trade groups, as well as judiciary authorities, made their concerns public after the intended acquisition was announced. 

Equally, Monsanto’s reputation in Europe was addressed in a joint press conference on 14 September by the two firms’ CEOs who did not dismiss the idea Monsanto’s name may be scrapped once the transaction is complete.

Bayer’s spokesman on Wednesday said: “Probably there is still one year ahead of us before completion [of the deal], so it’s too early [to talk about changing the name]. However, of course we are aware our brand name [Bayer] is very strong, we know this.

“And we can be sure that we will keep this favourability. But I can’t be more precise now.”

On its current agrochemicals business, Crop Science, Bayer said the “persistently difficult” conditions in those markets had caused a fall in sales of 1.2% year on year to €2.06bn, while EBITDA remained practically flat at €318m, compared to €316m in the third quarter of 2015.

“Crop Science sales developed encouragingly in Europe and North America. Sales edged forward year on year in the Asia/Pacific region but declined in the Latin America/Africa/Middle East region,” said Bayer.

“Higher selling prices and a positive currency effect of around €80m stood against lower volumes, higher write-downs on receivables and higher research and development expenses, among other things.”

Earlier on Wednesday, Bayer announced third-quarter net profit increased 18.8% year on year to €1.19bn, backed by stronger earnings at all its business segments, except consumer health, the German producer said on Wednesday.

Sales for the three months to September 2016 were up 2.3% at €11.3bn, with operating profit rising 14.2% to €1.80bn.

Earnings before interest, tax, depreciation and amortisation (EBITDA) before special items for the quarter grew 6.0% to €2.68bn, it said.

For the first nine months of the year, Bayer posted a 16.6% year-on-year growth in net profit to €4.08bn, with sales up 0.4% at €34.9bn.

Operating profit for the period was up 17.5% at €6.25bn, with EBITDA before special items up 9.4% at €9.12bn.

Additional reporting by Pearl Bantillo