Bayer Shareholders Mostly Upbeat About Monsanto Deal
15 September 2016 - 3:40PM
Dow Jones News
FRANKFURT—Bayer AG shareholders appeared cautiously optimistic
Thursday after the company said it had sealed a landmark $57
billion deal to acquire U.S. seed maker Monsanto Co.
The German drugs and chemicals giant, which had been pursuing
Monsanto for four months, Wednesday reached an all-cash agreement
to acquire the U.S. firm at $128 a share. The price came as
welcomed news for initially skeptical investors, who had predicted
Bayer would need to raise its bid to between $130 and $135 a share
to satisfy Monsanto's board.
The deal is valued at $66 billion, including debt. The companies
expect the transaction to close by the end of next year.
"I was surprised that the price was cheaper than I thought,"
said Markus Manns, fund manager at Bayer shareholder Union
Investment. He suggested that Monsanto may have been in a weaker
negotiating position than many observers thought because of the
weak North American crop market.
Bayer's share price rose Wednesday to an intraday high of €97.71
($109.73) on news of the deal, but closed up just 0.3% at €93.55.
The stock was down 1.5% in midday trading Thursday.
The "lower-than-expected deal price is likely to be well
received [by investors], although the long period of closing is
likely to cap significant upside in the Bayer shares through 2017,"
according to analysts at J.P. Morgan.
In addition to courting Monsanto this summer, Bayer Chief
Executive Werner Baumann spent countless hours trying to convince
his own investors that the deal would add value to the company.
Many resisted, believing the takeover would prove too taxing for a
drugs company, already straddled with high debt.
Bayer's net debt stood at €17.45 billion (about $20 billion) in
2015, more than double its net debt of €7 billion in 2011, before a
string of acquisitions.
But so far investors seem to think that the lower-than-expected
price, combined with the current lending environment, could allow
it to reduce its debt relatively quickly.
"Deleveraging is doable," said Mr. Manns. He added that Mr.
Baumann, who assumed the top job just two weeks before launching
his bid for Monsanto in May, had shown himself to be "price
disciplined" and not willing to pay any figure to close a deal.
"As it is funded primarily with money borrowed at very low
rates, the deal should be accretive to Bayer," said Jim Nelson, a
portfolio manager and Bayer investor Euro Pacific Capital Inc. in
New York. "The combined company would control 30% of the overall
seeds market, resulting in increased pricing power," he added.
Still, investors and analysts have noted that Bayer would have
little flexibility to pursue other acquisitions. To generate cash,
it may need to divest its majority stake in Covestro AG, a
specialty plastics business that Bayer spun off last year, and its
animal health unit, some investors said.
There is also concern over how a deal would reshape Bayer's
portfolio, shifting it away from lucrative health care operations
toward its agriculture business. Bayer's crop science division
would comprise roughly half of overall group sales after an
acquisition of Monsanto, compared with 30% in 2015. The health care
business would then comprise roughly the other half of sales.
Last week, when Bayer increased its bid for Monsanto to $127.50
a share, some investors remained opposed to the deal. Greg Herbert,
a fund manager at U.K.-based Jupiter Fund Management PLC, said then
that Bayer would "be left with a highly geared balance sheet and
the management effort to integrate the two businesses could easily
lead to the larger pharmaceutical business being neglected."
Mr. Herbert said Thursday he had no further comment on the
deal.
Before the integration process can begin, Bayer faces potential
regulatory challenges that could hold up, or bar the deal
altogether. Bayer and Monsanto have some overlapping businesses in
the areas of cotton seeds and herbicides, which could force the
companies to divest some of those units, analysts said.
The deal comes amid a wave of consolidation in the global
agrochemical industry and as a number of rivals, including Dow
Chemical Co., DuPont Co., Syngenta AG and China National Chemical
Corp. face their own regulatory hurdles over planned tie-ups.
"There is a decent chance the deal will be rejected on antitrust
grounds," said Mr. Nelson at Euro Pacific. "There has been a lot of
consolidation recently, so regulators will be very reluctant to
approve the deal."
Bayer and Monsanto Wednesday acknowledged they face regulatory
issues but expressed optimism they could be easily addressed.
Write to Christopher Alessi at christopher.alessi@wsj.com
(END) Dow Jones Newswires
September 15, 2016 09:25 ET (13:25 GMT)
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