Bayer offered $62bn to buy Monsanto, deepening investor concern that it’s stretching its finances to become the world’s biggest seller of seeds and farm chemicals.
The May 10 written proposal to Monsanto offered $122 a share in cash, the Leverkusen, Germany-based company said in a statement yesterday. Bayer’s stock dropped as much as 3.6%, extending losses since the potential deal was first revealed. Monsanto shares posted muted gains, rising to $110 in premarket trading in New York, signalling that investors remain sceptical about the deal.
“The disclosed price is at top end of the limit and just about works out,” said Markus Manns, who oversees almost $300mn at Union Investment, including Bayer shares. “Should it rise any further, which appears probable, the takeover will become increasingly unattractive.”
The proposal gives investors insights into chief executive officer Werner Baumann’s style and ambitions as he attempts to pull off the biggest corporate takeover ever by a German company after less than a month at the helm. Buying St Louis-based Monsanto would give Bayer a controversial pioneer of crop biotechnology. The kind of genetically modified seeds that Monsanto started to sell two decades ago now account for the majority of corn and soybeans grown in the US.
The two companies are engaged in “constructive discussions,” the CEO said.
The offer, which values Monsanto’s equity at about $53bn, represents a 37% premium to the May 9 closing price. The payment would be funded with a combination of debt and equity, with about $15.5bn coming from selling shares to existing investors. Bayer doesn’t envisage selling any assets to fund the purchase, Baumann said.
China National Chemical Corp, or ChemChina, won over Syngenta in February by valuing the Swiss company at more than 16 times earnings before interest, taxes, depreciation and amortization, Susquehanna Financial Group analyst Don Carson said in a note on Thursday. A similar multiple means Bayer would need to offer $145 a share for Monsanto, he wrote then, a price that would value the US company’s equity at $63bn.
Bayer fell 3.4% to 86.48 euros, the lowest since October 2013, as of 1:03pm in Frankfurt. The stock plunged by the most in seven years on Thursday when it confirmed having made an offer, without disclosing the financial details. Monsanto hasn’t responded to the offer publicly, beyond saying that it was reviewing the terms.
“What we saw last week was an uneducated reaction in the media and the press because we did not communicate the details of our proposal,” Baumann said on a conference call yesterday. “We are utterly convinced of the rationale” of the proposal.
A deal would add to core earnings per share by a mid-single-digit percentage in the first full year after completion, and a double-digit percentage thereafter, Bayer said. The German company also expects earnings to be bolstered by savings of about $1.5bn from the fourth year following the deal.
Monsanto said on Thursday it was consulting financial and legal advisers. In a note to clients, Citigroup analysts Peter Verdult and Andrew Baum said they “would be surprised if Bayer’s first proposal was accepted outright.”
Bayer would likely abandon the Monsanto name after the purchase, like it has with previous acquisitions, according to a person familiar with the matter. This could help distance the enlarged company from Monsanto’s reputation, the person said.
The offer marks a reversal of roles for Monsanto. The company previously sought to buy Swiss pesticide maker Syngenta, but abandoned the $43.7bn bid in August after the other company refused to agree to a deal.
The crop and seed industry is being reshaped by a series of large transactions. China National Chemical Corp agreed in February to acquire Syngenta for about $43bn. Meanwhile, DuPont Co and Dow Chemical Co plan to merge and then carve out a new crop-science unit.
Bank of America Corp and Credit Suisse Group are advising Bayer and support the financing of the deal, while Rothschild has been retained as an additional financial adviser.