Possible Merger: Bayer's Monsanto bid concerning to investors

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WASHINGTON >> Bayer's unsolicited takeover offer for Monsanto met with skepticism as concerns mounted that the German company would need to take on too much debt and dilute equity holdings in its quest to acquire an embattled target.

Shares of Bayer plunged by the most in seven years in Frankfurt after the drugmaker confirmed an offer to buy the world's largest seed producer, which has a market value of about $45 billion, for an undisclosed amount. Monsanto's stock also posted muted gains, rising less than 5 percent. Bloomberg News was first to report a week ago that Bayer was exploring a bid to become the world's biggest supplier of farm chemicals.

The proposal by Werner Baumann, who's been at Bayer's helm for less than a month, follows Monsanto's failed attempt to buy Syngenta and the proposed merger of Dow Chemical Co. and DuPont Co. St. Louis-based Monsanto said on Wednesday night that it's reviewing the offer, hours after its Chief Operating Officer Brett Begemann told Reuters "there's nothing there." Bayer is considering asset disposals and a share sale to finance the deal, according to people familiar with the matter.

Too much

"The acquisition is just one notch too big," said Markus Manns, who oversees about $250 million in assets at Union Investment GmbH, including Bayer shares, in Frankfurt. "It is unclear why, of all things, they would choose to do it now."

The German company is exploring the potential disposal of its animal-health business and the remaining 69 percent stake in plastics business Covestro AG, the people said, asking not to be identified because discussions are private. Animal health could fetch $5 billion to $6 billion, according to one of the people, and the Covestro holding is worth about 4.9 billion euros ($5.5 billion).

"This financially complex deal looks like bad news to us," Jean-Jacques Le Fur and Philippe Lanone, analysts at Natixis Securities, wrote in a note to clients, downgrading Bayer to neutral. "We find the deal unconvincing from a strategic angle."

Bayer, which may need to pay a 50 premium for Monsanto, could sell the U.S. company's crop protection unit for $19 billion to help fund the purchase, Jacob Thrane, an analyst at Baader Bank AG, said in a note to clients. It would still need to borrow another $21 billion, leading to a drop in its credit rating, he wrote.

The purchase would be break-even on the basis of earning per share only if Bayer capped the offer at $108-a-share, and raised $15 billion in debt and $27 billion from equity sales, Sanford C. Bernstein & Co. analysts Jeremy Redenius, Ronny Gal and Jonas Oxgaard wrote in a note to clients on Thursday. But the company is likely to need to pay about $120-$125 a share to get the deal done, they said.

If Bayer buys Monsanto, it could be the biggest acquisition globally this year and the largest German deal ever, according to data compiled by Bloomberg. A takeover of Monsanto would require an enterprise value of as much as 65 billion euros.


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