By Christopher Alessi
FRANKFURT -- German pharmaceutical and chemicals giant Bayer AG
on Monday said it made an all-cash offer to acquire Monsanto Co.
for $62 billion, valuing the U.S. company at a substantial premium
in a deal that would create the world's largest agrochemicals
company.
Bayer, which confirmed last week that it had approached Monsanto
about a takeover, said the $122-a-share bid values Monsanto at 37%
over its closing share price of $89.03 on May 9, the day before
Bayer made a written proposal to the U.S. company.
"This transaction represents a compelling opportunity for
Monsanto's shareholders," Bayer Chief Executive Werner Baumann said
on a conference call with reporters Monday. The deal would provide
investors "immediate and certain value," Mr. Baumann added.
Monsanto on Monday said its board was "carefully reviewing"
Bayer's proposal but declined to comment further.
Monsanto investors said they were receptive to Bayer's offer,
but expected Monsanto's board of directors to angle for a higher
price.
"It's a very good initial bid for the company," said James
Zoldy, president of Halsey Associates Inc., a New Haven,
Conn.-based firm, which owns Monsanto shares. "We think there is
some upside from that, and it's going to have to be finessed by the
[Monsanto] board to extract additional value." He said that
Monsanto's board will have to be careful not to drive too hard a
bargain, given there are few other potential suitors for the
company.
Bayer said it would finance the deal -- the largest foreign
corporate takeover effort ever by a German company -- with a
combination of debt and equity, including a share sale worth around
25% of the total transaction value. That means the company would
launch a capital increase of approximately $15.4 billion, Chief
Financial Officer Johannes Dietsch said.
Shares in Bayer, which have been under pressure since the
company said it was in talks with Monsanto, were down about 4% in
afternoon trading amid concerns about costs and financing.
The German firm has faced investor concern over whether its
relatively high-debt level would allow it to pay for such a
transaction without a capital increase or divestitures.
Mr. Dietsch on Monday said the expected future strong cash-flow
generation of Monsanto and Bayer's combined crop businesses would
allow the German firm to quickly deleverage following an
acquisition.
"We will increase our debt level on our balance sheet
substantially," Mr. Dietsch said on the conference call. "We are
willing to take a higher debt level with a strong desire to reduce
that debt level thereafter with strong cash flows."
Bayer's net debt stood at EUR17.45 billion (about $20 billion)
in 2015, more than double its net debt of EUR7 billion in 2011,
before the company embarked on a string of acquisitions.
The company's net debt "would clearly exceed EUR40 billion at
the time of the transaction," according to calculations by analysts
at Equinet Bank. "While the leverage appears to be manageable from
a ratings perspective, we believe that it would curtail Bayer's
strategic flexibility in the health care space going forward," the
analysts wrote in a note Monday.
The deal could also irk some Bayer shareholders who tend to view
the company more as a pharmaceutical player than a crop
business.
Markus Manns, a portfolio manager at Bayer shareholder Union
Investment, said he was concerned the acquisition of Monsanto would
focus Bayer too much on agrochemicals at the expense of its health
care operations. The pharmaceutical and consumer-health businesses
are "more attractive" because the agrochemical business tends to be
"a little more volatile," he said.
Mr. Manns added he understood the strategic value of Bayer's bid
-- to make itself a stronger player in the seeds business, where it
has lagged behind -- but argued the acquisition would be too large.
"If they had found a 'mini-Monsanto' it would have made more
sense," he said.
If Bayer were to acquire Monsanto, the German company would
generate half of its revenue from crop science, according to
analysts at Bryan Garnier, a European investment bank. Bayer's
agrochemical division posted revenue of EUR10.37 billion last year,
out of total group sales of EUR46.3 billion.
Bayer's Mr. Baumann, who assumed the top job just three weeks
ago, said the deal was in line with the company's strategy to
create an integrated life sciences company focused on
agrochemicals, pharmaceuticals and over the counter drug
offerings.
That approach was implemented by Mr. Baumann's predecessor,
former Chief Executive Marijn Dekkers, who aggressively sought to
shake up the staid German corporate through a series of
acquisitions and divestitures.
Mr. Dekkers last year spun off part of Bayer's EUR11 billion
specialty plastics division -- now known as Covestro AG -- through
an initial public offering. Bayer still holds a majority stake in
Covestro, which primarily produces polyurethanes and
polycarbonates, but has said it wants to eventually fully exit the
business. The year prior, Bayer acquired U.S.-based Merck &
Co.'s over the counter business for EUR14.2 billion.
Bayer said the offer for Monsanto wasn't subject to a financing
condition and that it was "highly confident" in its ability to
finance the transaction based on discussions with its financing
banks, Bank of America Merrill Lynch and Credit Suisse.
Analysts have speculated that Bayer might have to speed up its
exit from Covestro or sell off its animal-health division to help
finance deal. Mr. Baumann insisted that no portfolio changes would
be necessary to finance an acquisition.
Bayer said a tie-up with Monsanto would boost Bayer's core
earnings a share by a mid-single-digit percentage in the first year
after the deal closes and a double-digit-percentage thereafter. It
also said the combination would deliver synergies of $1.5 billion
after three years.
"It's positive news that the synergies are better than expected
and that the price is not as high as we originally thought," said
Union's Mr. Manns, who predicted an offer price could have been as
high as EUR140 billion. But he still suggested there could
ultimately be a shift in Bayer's investment base. Union Investment,
he added, would wait "to find out the final price" before deciding
on whether it would remain a shareholder.
Bayer noted that a combination of its crop-science business with
Monsanto would be "complementary" from both a product offering and
geographic perspective. St. Louis-based Monsanto is a global leader
in seeds, while Bayer has a greater focus on crop-protection
chemicals.
However, Bayer acknowledged that it faces a potential backlash
against its reputation in Europe over a deal with Monsanto, which
is the world's largest producer of genetically modified crops.
European nations, particularly Germany, strongly oppose the use
of so-called GMOs in farming. Bayer doesn't sell any GMO products
in Europe, but is a major producer of genetically modified crops in
other parts of the world, including North America.
The bid comes amid global consolidation in the industry.
Dow Chemical Co. and DuPont Co. last year announced a merger
that the companies -- together valued at roughly $103 billion --
said would ultimately create one of the world's largest
agrochemical firms. Earlier this year, Chinese state-owned China
National Chemical Corp. announced a $43 billion cash deal to
acquire Syngenta AG, after a failed attempt by Monsanto to buy the
Swiss agrochemicals group.
--Jacob Bunge contributed to this article.
Write to Christopher Alessi at christopher.alessi@wsj.com
(END) Dow Jones Newswires
May 23, 2016 13:16 ET (17:16 GMT)
Copyright (c) 2016 Dow Jones & Company, Inc.
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