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Back in November, I told readers that ag merger mania would continue. M&A activity is being driven by low crop prices – and therefore a need for higher market share to maintain profits.
This forecast followed the $130 billion mega-merger between DuPont (NYSE: DD) and Dow Chemical (NYSE: DOW). Sure enough, in February, ChemChina announced a $43 billion cash offer for Syngenta AG (NYSE: SYT).
And now we have German conglomerate Bayer AG (OTC: BAYRY) making a $62 billion offer – $122 a share cash – for the GMO seeds provider Monsanto (NYSE: MON).
Monsanto labeled the offer as “incomplete and financially inadequate.” When translated into German that means, “We are very anxious to be bought out, but want more money.”
Bayer-Monsanto Deal Hurdle
If this deal goes through, it will lower the number of players in the agriculture chemicals and seeds industry down to a mere “big three.”
The industry, both seeds and agrichemicals, will mainly be split up among Dow-DuPont, ChemChina-Syngenta and Bayer-Monsanto. Other companies like Germany’s BASF (OTC: BASFY) will be left by the wayside.
Source: Financial Times
The executives at Bayer and Monsanto are sure they will get deal approval with just some divestitures required. But I’m not so sure.
Farmers are sure to raise heck. They are already under pressure from low crop prices. Increased input costs, from three companies controlling the market, are not what they need right now.
The increased use of “bundles” put out by these firms scares farmers. A bundle is where seeds and chemicals with certain traits will only work in conjunction with one another. So farmers’ choice of what seeds and what chemicals to use may grow increasingly restricted.
The possibility of a “big three” is sure to grab the attention of regulators too. That’s despite the limited overlap between Monsanto’s mainly seed business and Bayer’s mainly agrichemicals business. Regulators in the United States, Europe, China and Brazil are already making noises.
Some regulators have raised the question of the elimination of parallel paths in research and development – i.e., the lack of competition in researching new chemicals and seeds.
Bad Deal for Bayer
Bayer shareholders are keeping their fingers crossed the deal does not go through. The company’s American depositary receipts traded here in the U.S. are down about a quarter since the proposed deal was announced.
A survey conducted by Bernstein showed that only 7% of Bayer shareholders are in favor of the deal proposed by new CEO Werner Baumann. The Financial Times quoted one major London-based shareholder as saying, “When it comes to capital allocation, I think management have lost their minds.”
In other words, shareholders think Bayer management is paying way too much for Monsanto as it is. And the bid will have to be raised to be successful.
I see where Bayer’s management is coming from. There could be synergies in the $1.5 billion range. And the combined group could then be spun off into a new company.
But, as a former Bayer shareholder, I hate the deal.
I agree that Bayer is spending way too much for a company that is performing poorly. Having the most environmentally toxic brand in the world may finally be catching up to Monsanto.
Bayer is already beginning to lose its “clean” image. Its “neonics” – neonicotinoid pesticides – are being cited as a main culprit behind the decline of bee populations globally.
A merger will only make Bayer the target of environmental groups around the world. That will keep Bayer’s lawyers busy, but hurt shareholders.
Herr Baumann should listen to shareholders who want a greater emphasis on the health care portion of the company. But instead, it is believed Baumann will dump the animal health business to fund a portion of the Monsanto bid.
The previous CEO, Marijn Dekkers, had a focus on turning Bayer into a pure life sciences company. And sales at its health care division in 2015 soared by nearly 20%. That’s more than double the rate at the crop sciences division.
Although it’s rare in Europe, I would not be surprised to see a shareholder revolt against the new CEO – especially if Bayer’s shares keep falling if Baumann keeps raising the bid for Monsanto.
For me, both stocks are a no-go. Down the road, BASF may look interesting. And the Dow-DuPont merged entity is definitely of interest.
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