Bayer’s proposed $66 billion takeover of US seeds company Monsanto aims to create “a Global Leader in Agriculture”, says Bayer CEO, Werner Baumann, an “innovation engine to deliver enhanced solutions for the next generation of farming”.
The impact on both companies’ pharmaceutical, animal health and consumer health businesses will be to create a business with annual sales of over €23 billion, but significantly less has been said publicly by either party about what the strategic focus for this merged business will be.
Meanwhile, national governments are facing consumer and regulatory pressure against the creation of trading behemoths capable of influencing a substantial swathe of pricing across multiple key sectors. Will this deal survive that pressure?
Effects on the pharma business
The result of the merger will be a $66 billion agrochemical and pharmaceutical company, inclusive of $9 billion of additional debt. $1.5 billion of cost savings are expected to be achieved after the third full year of trading as a combined entity following the date of the deal’s expected close, or completion, in December 2017.
Bayer will pay for Monsanto in cash with a $57 billion bridging loan and a promise to sell at least $19 billion in convertible securities and through rights issues to its shareholders.
If the deal fails to get regulatory approval, Bayer will have to pay to Monsanto a break-up fee of $2 billion. There is a complex set of consents needed to take the deal to completion including those from at least 30 separate anti-trust authorities globally, such as those in the US, EU, Brazil and Canada.
Initially, Bayer will shift its focus towards its crop-science division with fears that its combined pharmaceutical division will receive significantly less attention from management. Although Bayer CEO, Werner Baumann, has recently emphasised that the deal will reinforce Bayer’s “leadership position as a life science company”, it remains to be seen whether that status can be retained within a newly combined group overtly focused, and potentially distracted, by its need to be a global leader in agriculture.
The newly merged business will create a group whose sales are split almost equally between pharmaceutical life sciences and agricultural sciences. If the respective P/E ratios for each of the pharmaceutical and seed and pesticide sectors start to diverge significantly, a case will be made that it would make more sense (for shareholders and potential investors) to spin-out the pharmaceutical segment into a separately listed company.
Threats to the deal
But national governments are loath to allow the creation of trading behemoths capable of influencing a substantial swathe of pricing across multiple key sectors where governmental, consumer, and business, watchfulness is prevalent. The Bayer-Monsanto merger has been designed to create a one-stop shop for seeds, crop sprays and advice to farmers worldwide.
The broad areas of concern have already been flagged by various competition and anti-trust regulators, including European Union Competition Commissioner, Margrethe Vestager, who said that the agriculture market was already very concentrated with a small number of global players dominating the industry.
Potentially in a market dominated by behemoths, all a start-up or fledgling business can hope for is to be acquired by one of them. This state of affairs will resonate with anyone who has been involved in fundraising for early stage pharmaceutical companies where it sometimes feels as though all you are doing is creating a pipeline for bigger companies to pick-over.
In deal-making time, December 2017 is a long way away and much could change.
Catherine Moss is a Partner at law firm Winckworth Sherwood, specialising in all aspects of corporate finance, including equity capital markets, public and private takeovers and mergers and restructurings.
