NEW YORK/FRANKFURT (Reuters) — Bayer has made an unsolicited takeover proposal to Monsanto, aiming to create the world’s biggest agricultural supplier and take advantage of converging pesticides and seed markets.
Monsanto disclosed the approach May 18 before Bayer confirmed its move, though neither released proposed terms.
The US$42 billion market capitalization of Monsanto means the deal would likely eclipse ChemChina’s planned acquisition of Syngenta — a target Monsanto itself pursued last year — and could face U.S. antitrust hurdles.
A Monsanto statement said its board was reviewing the proposal, which is subject to due diligence, regulatory approvals and other conditions. There is no assurance that any transaction will take place, it added.
There was no further information available by Western Producer deadlines for the May 26 issue.
Bayer shares dropped after the deal was announced with some investors worried by the potential cost of a deal. Monsanto’s share price increased.
UBS Global Asset Management, which Reuters data shows is among Bayer’s 30 biggest investors, said it was “deeply concerned” about the burden on Bayer’s finances from a takeover, saying it would prefer the companies to agree on a joint venture or a nil-premium merger.
Deutsche Bank analysts said a deal could shift Bayer’s centre of gravity to agriculture, accounting for 55 percent of core earnings, up from 28 percent last year, excluding the Covestro chemicals business that Bayer plans to sell.
That would have a negative impact on sentiment among Bayer’s health-care focused investor base, the bank said.
Bayer, which has a market value of $90 billion, said the merger would create “a leading integrated agriculture business,” referring to Bayer’s push to seek more synergies from combining the development and sale of seeds and crop protection chemicals.
Most of the major agrichemical companies are aiming to genetically modify more robust plants and custom build chemicals to go with them.
Neither company mentioned a takeover price, but Bernstein Research analyst Jeremy Redenius estimated that it would be US$47 billion, plus $7.5 billion in assumed debt. He said Bayer might need a $30 billion share issue to help fund the purchase.
Citi analysts have said Bayer would probably need to pay 14 to 16 times Monsanto’s core earnings, implying a takeover price including debt of $64 to $73 billion.
A sale of Bayer’s stake in foam chemical maker Covestro could raise about $4.5 billion, while its animal health business, which Bayer has said it might put on the block, could fetch up to $8 billion.
The proposal comes as ChemChina’s deal for Syngenta faces regulatory review in the United States over concerns about the security of U.S. food supply.
Any deal between Bayer and Monsanto, which would be Bayer’s largest by far and dwarf the $19 billion takeover of drug-maker Schering in 2006, could raise U.S. antitrust concerns because of an overlap in their seed businesses, particularly in soybeans, cotton and canola, antitrust experts said.
The proposal comes less than three weeks after Werner Baumann took over as Bayer’s chief executive officer, a sign of the power base he built in his previous role as strategy chief.
Bayer, the inventor of aspirin and maker of Yasmin birth control pills, is far more diversified than Syngenta or Monsanto, with products including cancer drugs, flea and tick collars for pets and Coppertone sunscreen. Some analysts have said a deal with Monsanto could lead to a break up of the group.
Bayer’s crop science division has businesses in seeds, crop protection and non-agricultural pest control, potentially complementing Monsanto’s seeds assets.
Bayer and BASF have both been looking to build scale in agrichemicals. Monsanto said after its failure to land Syngenta that it didn’t need to do a deal, but it has also been involved in discussions.
Monsanto approached Bayer this year to express interest in the latter’s crop science unit, in the form of an acquisition or joint venture, sources said in March.
Bayer and BASF had been exploring tie-ups with Monsanto for months, but valuation concerns have made a deal elusive, sources have said.
Bayer is ranked No. 2 in crop chemicals, with an 18 percent market share, just behind Syngenta at 19 percent, industry data shows.
Monsanto is the leader in seeds, with a 26 percent market share, followed by DuPont with 21 percent. DuPont agreed last year to merge with Dow Chemical.
Any Bayer-Monsanto deal would further reduce the number of major players in seeds and pesticides to four from six.