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Bayer Secures Monsanto Takeover With $56 Billion Bid Bayer Strikes Deal for Monsanto, and Hurting Farmers Grimace
(about 11 hours later)
Monsanto, the American maker of fertilizers and agriculture products, agreed on Wednesday to a takeover by Bayer, the German chemical conglomerate, for $56 billion after months of negotiations. Don Halcomb, a 63-year-old farmer in Adairville, Ky., is expecting his profit to vanish this year, largely because of the confluence of falling crop prices and rising costs for seeds and other materials.
Bayer will acquire Monsanto for $128 per share in cash, according to a statement released by the companies. That price represents a 44 percent premium to Monsanto’s stock on May 9, the day before Bayer’s interest in a deal first surfaced. Including the assumption of debt, the transaction is valued at $66 billion. The price of an 80,000-kernel bag of seed corn rose to $300 from $80 in the last decade, as the companies that produced them consolidated, he said. And with the recent decline in commodity prices, Mr. Halcomb said he expects to lose $100 an acre this year.
The deal is among the largest German corporate takeovers of an American company, and would make Bayer the world’s largest supplier of seeds and farm chemicals, according to a recent note by Argus Research. But it faces the risk of government opposition at a time when regulators have not been shy in quashing transactions over antitrust concerns. “We’re producing our crops at a loss now, just like the oil guys are pumping oil at a loss,” Mr. Halcomb, who grows corn, soybeans, wheat and barley on his 7,000-acre family farm, said by telephone on Wednesday. “You can’t cut your costs fast enough.”
An analysis by Bloomberg law found that over the last few years, deals greater than $10 billion had a 30 percent failure rate. Bayer and Monsanto would be two of the remaining agribusiness giants to merge, and regulators are likely to scrutinize whether the deal could raise prices that farmers pay for seeds and chemicals. It is a common plight of farmers across the United States, with the global agriculture industry in a wrenching downturn. Because farmers have produced too much corn, wheat and soybeans, they have been forced to slash prices to sell their crops. They have also reduced spending on seeds, pesticides and fertilizer, which has eaten into sales at agribusiness giants, including Monsanto and DuPont.
The European competition regulators said publicly before a deal was even signed that they would look at how the combination could affect prices and the availability of seed products as well as research. In response, these companies have sought multibillion-dollar deals to cut costs and weather the industry’s storm. Four major agribusiness mergers have been announced in the last year. The latest is Bayer AG’s $56 billion takeover of Monsanto — the largest acquisition of 2016 — announced on Wednesday. Every merger creates the possibility of higher costs for farmers.
To assuage Monsanto’s concerns, Bayer threw in a $2 billion breakup fee if the deal fell apart on antitrust grounds. Mr. Halcomb buys seeds with traits licensed to Monsanto of St. Louis and seeds from DuPont, which has a deal pending to merge with Dow Chemical. His fertilizers are made of potassium compounds and phosphate produced by Agrium of Calgary, Alberta, which on Monday agreed to combine with the fertilizer producer Potash Corporation of Saskatchewan. He uses pesticides made by Syngenta of Switzerland, which agreed in February to a takeover by the China National Chemical Corporation.
Bayer first revealed an offer for Monsanto in May, but that bid was promptly rejected, as was a revised offer later in the summer. Both times, Monsanto said the proposal was too cheap but that it remained open to discussions with both Bayer and other parties. “It’s just like any other industry that consolidates,” Mr. Halcomb said. “They tell the regulators they’re cost-cutting, and then they tell their customers they have to increase pricing after the deal’s done.”
The pressure increased for Monsanto find a tie-up as many other agribusiness giants reached milestones toward closing their own deals. Two American rivals, Dow Chemical and DuPont, agreed to a merger last year to combine their crop-sciences businesses, and that transaction is under Justice Department review. The companies say they are merging to diversify and increase growth and research capabilities, but these deals, given their size and scope, have already caught the attention of lawmakers and regulators in Washington. There is no guarantee that they will all receive regulatory approval, and some companies may have to sell assets to allay antitrust concerns. Dow’s merger with Dupont is under Justice Department review.
And the deal comes not long after a United States regulator gave approval for another merger in the agribusiness world. The regulator, the Committee on Foreign Investment in the United States, said on Aug. 22 that the China National Chemical Corporation was cleared to purchase the Swiss chemical and seed company Syngenta for $43 billion. That removed one of the biggest obstacles for the deal, putting additional pressure on Monsanto to find a combination elsewhere to compete (Syngenta rejected a takeover bid by Monsanto last year). The market seemed to anticipate hurdles for the Monsanto deal on Wednesday. Shares of the company closed about 20 percent lower than the $128 per share cash offer from Bayer, which is based in Leverkusen, Germany. Shares of each company gained less than 1 percent after the deal was announced.
This is the second large, agriculturally related deal announced this week after Potash Corporation of Saskatchewan and Agrium decided to merge, creating a Canadian fertilizer giant. Adding the assumption of about $10 billion of Monsanto debt, Bayer’s total $66 billion pact is the largest all-cash deal, according to data compiled by Thomson Reuters, ahead of InBev’s $60.4 billion offer for another St. Louis-based company, Anheuser-Busch, in June 2008.
Monsanto is famous for its production of genetically modified seeds, while Bayer is well known for the aspirin that carries its name. In addition to health care, Bayer also has a crop sciences division, in which Monsanto would fit. Senator Charles E. Grassley, Republican of Iowa and chairman of the Judiciary Committee, scheduled a hearing next week to discuss the possible effect of these agriculture-related mergers on farming. Iowa produced more corn last year than any other state, according to the National Corn Growers Association.
Bayer plans to finance the all-cash transaction by raising $19 billion in equity through mandatory convertible bonds and a rights issue. Bank of America, Credit Suisse, Goldman Sachs, HSBC and JPMorgan Chase have committed to provide bridge financing for $57 billion more. “It seems to be catching fire and happening so fast with so many,” Senator Grassley said in a phone interview. “When you have less competition, prices go up.”
Bayer expects the deal to add to earnings in the first year after it closes, and projects the companies will produce $1.5 billion of benefits from sales and cost-cutting after the third year. European competition regulators also said publicly, before a Bayer-Monsanto deal was even signed, that they would look at how it could affect prices and the availability of seed products, as well as research.
As part of their agreement, Monsanto and Bayer’s agriculture business, which is focused on seeds and traits, will be based in St. Louis, while its crop science headquarters will be in Monheim, Germany. Their digital farming activities will be based in San Francisco. Liam Condon, who leads Bayer’s crop-science division, said in an interview that the company did an “extensive analysis” with regard to antitrust before approaching Monsanto in May. Mr. Condon said that he does not believe there is much overlap between their portfolios, because Bayer’s focus is largely on crop protection, while Monsanto’s is on seeds and traits. He said the companies assume they may need to sell off some assets to appease regulators.
Bank of America and Credit Suisse provided financial advice to Bayer as well as suggestions on how to structure the deal. Rothschild served as another adviser to Bayer. Morgan Stanley and Ducera Partners were the financial advisers for Monsanto. Sullivan & Cromwell and Allen & Overy served as Bayer’s legal advisers, while Wachtell, Lipton, Rosen & Katz were Monsanto’s legal advisers. Monsanto, which is famous for its production of genetically modified seeds, rejected several offers from Bayer as too low. Wednesday’s deal represented a 44 percent premium to Monsanto’s stock price on May 9, the day before Bayer’s interest in a deal surfaced. To assuage Monsanto’s concerns, Bayer threw in a $2 billion breakup fee if the deal fell apart on antitrust grounds.
The strategic goal of the deal, according to Bill Selesky, an analyst at Argus Research, is to create a one-stop-shopping experience for farmers, making Bayer the world’s largest supplier of seeds and farm chemicals. By improving the product for farmers, the combined company could ultimately raise prices, Mr. Selesky said in an interview.
Senator Grassley said that he spoke with a few farmers who believed the deal was necessary so large agribusinesses can continue to absorb the cost of researching and developing products and getting government approval for them.
Bayer and Monsanto said they planned to cut about $1.2 billion worth of costs as part of the deal, helping to improve efficiency.
But Jim Benham of Versailles, Ind., the president of the Indiana Farmers Union, was not so optimistic. He blamed the rising costs of inputs — seeds, fertilizer and the like — for eating away at farmers’ profit margins, and warned that consolidation will make it worse. Costs have already risen by double digits over the last four to five years, and the proposed Bayer-Monsanto merger could accelerate that.
“The merger is going to hurt the farmer,” said Mr. Benham, who grows corn, soybeans and sometimes wheat on his 1,400-acre farm. “The more consolidation we have on our inputs, the worse it gets.”
Mr. Condon of Bayer said that the company would not raise prices without providing more value to farmers.
“This is a highly competitive industry and just increasing prices without have additional advantage or benefit for growers won’t go anywhere,” he said. “It’s up to us to show what we’re offering will help farmers improve their return on investment.”
Some farmers said the consolidation could even enable prices to fall.
Christine Hamilton manages a farm of more than 12,000 acres in Kimball, S.D., growing crops like corn and operating a ranch. She said that if the deal can pass the antitrust screening, then maybe it could actually help farmers.
“I understand how companies need to get bigger in order to be competitive,” she said. “As we are in a low part of the cycle, anything that might have a chance of reducing our input prices would be great.”