The rumors turned out to be true: Bayer has made a non-binding offer to acquire the shares of Monsanto. At $62 billion this would be the largest deal of the year and the largest M&A deal ever for a German company. The initial response by Bayer shareholders has been negative: the shares have plunged by more than 16% since the announcement - and no wonder:
- To raise $64 billion Bayer would have to a) sell off some valuable assets in its animal health business, b) dilute existing shareholders with a massive stock offering, and c) take on $billions in additional debt. On the final point The New York Times writes:
"Because $47 billion of the total value of the deal will be funded in debt, it will leave the merged group with borrowings of four times its combined Ebitda.
But in reality, much of that debt is being loaded onto Bayer’s health care business. If the crop science unit were buying Monsanto unaided, it would end up with net borrowings that were more than seven times combined Ebitda, which looks too high for comfort. The risk is that Bayer’s options for making acquisitions in health care will be stunted. Buying Monsanto could benefit one side of the business at the expense of the other.
The biggest concern for shareholders may simply be that the deal looks like it will destroy value. Bayer expects $1.5 billion of annual synergies. According to a Breakingviews estimate, this represents a net present value of around $11 billion compared with that $15 billion premium. And Bayer has not said how much is supposed to come from enhanced revenue, which is typically hard to achieve in real life."
Some other issues to consider:
- Bayer is primarily a (well-run) pharmaceutical company. Integrating a major non-German agriculture company would be a major challenge and lead to much internal management strife.
- The is a strong likelihood that the deal will be blocked by regulatory authorities due to anti-trust concerns.
- Monsanto - rightly or not - is one of the most hated corporations, especially in Europe. Many of its products - such as the genetically modified corn MON 810 - are banned in Europe, which would create a major headache for Bayer.
- Monsanto's flagship herbicide product RoundUp could be banned from Europe if an EU regulatory commission decides not to renew the license for glyphosate later next month.
- Farmers will lose out due to further consolidation in big agriculture following the DuPont-Dow merger.
- Monsanto wants to remain independent, so Bayer may have to considerably sweeten the deal beyond $62 billion to gain board approval.
I don't have a position in either stock, but at this point my recommendation is short BAYRY.