Monsanto good fit for Bayer but financial hurdles ahead – analysts

LONDON (ICIS)–Bayer’s potential acquisition of US agrochemicals firm Monsanto would be ideal for the German chemical major to expand in the agrochemicals industry, but the size of the deal will present it with financial difficulties which could derail the bid, analysts said on Thursday.

Bayer’s shares slumped on Thursday following the announcement by the company stating it had held private meeting with Monsanto executives to explore a potential deal.

By 12:30 London time, Bayer’s stock was trading at €89.21 per share, a decrease of 7.5% compared to its close on 18 May. Monsanto shares, on the other hand, were rising in pre-trading, up 8% prior to the US stock exchange opening, to $105.25.

For Bayer’s bid to go ahead, however, there would be a lot of financial engineering to do.

Chemical equity analysts at Bernstein Research said the market capitalisation of the agrochemicals major to be formed post-acquisition could reach €75bn, making it the world’s largest player in the sector.

However, due to the large scale of the deal, a number of problems surrounding the transaction’s financing could arise.

To acquire Monsanto, Bayer would have to look at a varied mix of financing sources – mainly debt and an equity raise – which could weaken the company’s capital structure and its valuation in the eyes of investors, leading Bernstein to claim that a merger and a subsequent split into different companies could be the way to go.

“We estimate a merger of Bayer and Monsanto without a control premium, followed by a spin-off of the Ag [Agrochemicals] business into a ‘NewAgCo’ would accomplish the same consolidation goal but without the need for Bayer to raise equity,” it said.

“This would allow the new Bayer to purely focus on their healthcare business, while at the same time enabling a well-positioned €75bn (our estimated market cap) global crop protection and seeds company to compete in the global Ag inputs market.”

A consensus view is indeed forming about the financial hardships Bayer would have to face in order to get the necessary cash for an outright acquisition of Monsanto. “There is a lot to be done,” said Ulrich Huwald, an analyst covering Bayer at Germany-based Warburg Research consultancy, regarding financing for an acquisition to be successful.

“There are a few players left who could make a step forward [to acquire or merge], including Bayer and Monsanto, after the consolidation seen with ChemChina acquiring [Swiss major] Syngenta and [US chemical majors, with agrochemicals operations] Dow Chemical and DuPont merging,” Huwald said.

“So you have to act or be left outside and miss the opportunity. In Bayer’s favour, for this transaction the company could have the advantage of its large-scale corporate activities, as well as its large regional scale in Europe and Latin America and access to Monsanto’s interesting products like GMCs [genetically modified crops],” he added.

Although GMCs are forbidden under the EU’s chemical regulation, Huwald added they will be needed in the future to feed the world’s fast-growing population, arguing Monsanto’s activities within that field would give Bayer the expertise it lacks on GMCs.

“From the perspective of a European company, they have lost several years towards GMCs research and commercialisation and they clearly couldn’t catch up organically. The acquisition would give Bayer a good opportunity to become a global player in this regard,” he said.

With Monsanto under Bayer’s radar, the chances of German chemical major BASF undertaking a “transformational deal” stand today further than at any other point in time. There would not be anything else big to acquire, and BASF could only try to acquire leftovers from transactions in which it did not participate.

For example, Huwald said both Bayer and Monsanto may need to divest their pesticides businesses, which BASF could acquire.

Recurrent market talk about BASF having secured a $50bn bridge loan for an acquisition, reportedly to finance a bid for Syngenta, may come back to the newswires. 

Focus article by Jonathan Lopez