Formerly a bystander in the large-scale mergers and acquisitions (M&A) activity that has swept through the agrochemicals industry, BASF’s announcement on 13 October of plans to invest €5.9bn to acquire a large part of Bayer’s seed business and some herbicides operations reestablishes it as a major player in the agrochemicals space, according to analysts.
BASF aims to acquire a large part of Bayer’s seed and non-selective herbicide businesses in an all-cash deal worth €5.9bn, expected to close in the first quarter of 2018 and subject to the closing of Bayer’s acquisition of US agrochems major Monsanto as well as approval by relevant authorities.
Chemical analysts described the transaction as a “win-win” for both companies. On one hand, Bayer’s acquisition of Monsanto could only go ahead with significant divestments in order to get approval from the antitrust authorities. On the other, BASF’s gains with the transaction a significant place among agchems majors, with the deal establishing it as a large player in North America as well, placing the German firm among players like the agrochems division of the newly formed DowDuPont.
MERGERS AND ACQUISITIONS
In 2016, several chemical analysts spoke of BASF’s need for a “transformational deal” if it wanted to maintain its position as one of the global chemical majors, as recent consolidation in the industry had left the German firm outside the large mergers and acquisitions (M&A) transactions of the last two years.
While not as big as other transactions, the deal would put BASF at the right place to compete in the agrochems industry with the large players, according to analysts. “We see the sale as a bit of a win-win for both... As expected, the required divestments centred around the seeds portfolio, along with divesting of their glufosinate franchise. This goes a long way to meeting those [antitrust authorities] concerns, with only vegetable and wheat seeds remaining in their seeds portfolio,” said chemical analysts at London-based Bernstein Research. Sales in 2016 at the seed and trait subdivision totalled €830m, while sales of the glufosinate chemicals stood at €495m, Bernstein said.
“We see the likelihood of requiring to divest these assets as possible [vegetable and wheat seeds], another €300m of sales. Meanwhile, BASF needed to buy the seeds business as the inputs industry business model is shifting to selling chemicals and seeds together and this being the last sizeable opportunity to obtain a position in seeds given recent consolidation.”
Bernstein’s analysts said the €5.9bn price stood €2bn higher than they had expected, which in turn would potentially lower Bayer’s rights issue to €3bn, down from the €5bn expected. The businesses being acquired generated €1.3bn of sales last year, the same revenue level as BASF’s existing agricultural business. Bayer’s shares, according to Bernstein expectations, could be worth €129 apiece in 12 months. The bank placed an ‘Outperform’ recommendation on the stock, or ‘Buy’ in other banks’ terminology.
Swiss investment bank UBS also said the transaction was “strategically attractive” for BASF, although adding that the high multiple paid for the assets (the enterprise value (EV) paid for BASF came in at 15 times (x) earnings before interest, taxes, depreciation and amortisation, EBITDA) would cause the pay-back to “take time”. Equally, they added that synergy prospects were limited at first due to a clause protecting jobs.
“The acquired business comes with over 1,800 employees that have been afforded a job protection agreement. We had expected some SG&A [selling, general and administrative] (if not R&D [research and development]) overlap and thus cost savings through rationalisation,” said the UBS analsyts.
“But for three years at least, permanent employees are protected by this agreement, and hence sales synergies, somewhat harder to deliver in the short term, will be key to creating value.” Despite that, UBS expects BASF’s shares to be worth €97 apiece in a 12-month period timeframe, and recommended a ‘Buy’ on the stock.
Equally positive about the prospects for BASF resulting from the transaction, analysts at Germany’s investment bank Baader Bank described the “win-win” deal which had been slightly cheaper than other transactions in the agrochems space, like those of Bayer itself, to acquire Monsanto, or ChemChina’s acquisition of Swiss Syngenta, which came at 16x EV/EBITDA.
“In our view, the seed split is very interesting for BASF as it has a strong focus on canola, soybean and cotton. With the high North American portion of the assets, BASF will be a strong player with DowDuPont and Bayer in North America,” said Baader. “The deal is EPS [earning per share] accretive in year one and should be ROCE [return on capital employed] accretive in year three, and BASF now can also offer an integrated strategy (seed and crop protection) and is therefore among the large players, not anymore a crop protection company only.”
Baader’s analysts also thought the deal announced on 13 October would make Bayer’s financing of Monsanto easier, as it came at a higher price than expected. Moreover, together with recent and coming Covestro transactions as well as the potential divestment of Bayer’s radiology business for approximately €5bn, the company’s capital increases may come at a lower amount than initially expected.
“When the Monsanto deal was announced, Bayer guided for a $19bn equity component. According to our calculations, the recent divestments, together with a potential radiology divestment, could mean that Bayer only needs a capital raise of below $10bn, which would be a positive surprise, in our view,” concluded Baader.