FOCUS: Bayer’s $62bn Bid for Monsanto – The Agricultural Industry Implications
01 Jun 2016 --- Bayer's shock blockbuster $62bn bid for Monsanto to create the world’s largest seller of seeds and pesticides is the latest in a line of megadeals in the agriculture sector but the deal faces a number of challenges ahead.
The offer from the German chemical and drugs company, marking the biggest ever corporate takeover by a German company, has been rejected by Monsanto, though the US agri-chemicals company has said it is open to further dialogue.
By buying the US GM seeds provider, Bayer says it will be able to tap into growing demand for pesticides and seeds as farmers look to cater for a rising global population which is set to grow by over 2.5 billion to reach nearly 10 billion by 2050.
Bayer has hoped to shore up investor support for the deal by forecasting that it will lead to cost-savings of around $1.5bn after the first three years.
However, Bayer’s investors have voiced concern that the size of the deal will put a strain on its finances while Monsanto’s status as the world’s biggest maker of GM seeds is a lightning rod for the green lobby in Europe who say the technology carries serious health risks.
Speaking to FoodIngredientsFirst, Jeremy Redenius, an analyst at Bernstein, said: “Investors have invested in Bayer for its healthcare franchise not for its agri-chemicals business. So buying Monsanto is not what they want.”
Compact, the German activist group, has already set up a website opposing the deal it labels a “monster.”
Compact said: “Bayer stockholders are afraid that the bad reputation of Monsanto in a merger could rub off on Bayer.”
Moody’s, the credit rating agency, said: “The transaction will give rise to significant execution, reputational and integration risks given its size both in terms of its monetary value and the scale of the operations acquired by Bayer.”
Speaking to FoodIngredientsFirst, William R Young, managing director of chemicals sector consultancy ChemSpeak, said: "It's possible that the anti-GMO and anti-Monsanto model could put some pressure on Bayer."
Some experts believe so fierce could be the backlash that Bayer could ditch the Monsanto name altogether to offset any brand damage it might inflict on Bayer.
Monsanto’s reputation in Germany (and Europe) has not been helped by repeated failings to get weed killer glyphosate approved in the EU amid fears that the product could cause cancer.
Despite these concerns, on a product and geographical level Bayer and Monsanto appear to represent a good fit: Bayer is strong in chemicals like herbicides while Monsanto is strong in seeds; likewise Bayer’s strong sales in Europe will complement Monsanto’s strong sales in the US.
However, there is some overlap in in products, such as Bayer’s Liberty Link products and Monsanto’s Roundup Ready, which is likely to prick the ears of regulators.
The proposed deal comes amid a wave of consolidation across the sector, following deals between ChemChina and Syngenta and Dow Chemical and DuPont.
According to analysts from Bloomberg, this could leave three companies with over 75 percent of the global market.
Bayer/Monsanto would be the biggest, boasting revenues of $23.1bn from seed and crop protections, ahead of Syngenta/ChemChina with $14.8bn and Dow/Dupont with $14.6bn.
While the Bayer deal is likely to prompt concern for regulators over its dominance in the market, it will also prove a concern for farmers, already hurt by lower crop prices, should they get squeezed by higher seed prices from the new giants.
Roger Johnson, president of the US National Farmers Union, said: “It’s troubling that six major players in the seed and crop protection industry will fall to three or four.”
He said that higher costs because of reduced competition will be the likely result.
A further concern is that should Monsanto bite on the deal, then Bayer will have to integrate Monsanto’s 20,000 strong workforce into its own headcount of 120,000, which are likely to have different corporate values.
Critics can point to the failed marriage of Daimler-Benz and Chrysler as an example of a failed marriage between a US and German company.
But Bayer is not inexperienced in integrating sizeable workforce and can point to its 2006 acquisition of rival Schering in a $19bn deal as well as its 2014 acquisition of Merck’s consumer health unit for $14.2bn.
For the time being, it seems that Bayer is the only buyer in town for Monsanto, although according to Young, BASF could emerge as a white knight.
He said: “BASF is the only one who could probably pull it off financially. You never know.”
However, earlier this year BASF chief executive Kurt Bock gave no indication that it was on the hunt to make a big acquisition.
Bock told Bloomberg Television that BASF was “comfortable with what we have.”
Should no rival bidder emerge and Bayer make a successful higher bid then the German company believes its ambitions will not be scuppered by regulators.
In a letter to Monsanto management, chief executive Werner Baumann said Bayer had analysed all the regulatory issues and “are very confident that we will be able to obtain all necessary approvals in a timely manner.”
But experts suggest that regulators may feel compelled to intervene in the Bayer/Monsanto deal due to the sheer number of deals been carried out in the sector.
Should the deal go through, it will have sizeable implications not just for both Bayer and Monsanto but for famers and all stakeholders in the agriculture sector.
by John Reynolds
