Deal Reporter
* BAFIN would wait for 'sufficiently concrete' plans before forcing disclosure
* German break fees typically more conservative than for US, lawyer says
BASF [ETR:BAS] may prefer to increase leverage with a significant cash portion in any potential bid for Syngenta [VTX:SYNN], two sector bankers said. This would avoid it being “hugely dilutive” to its own earnings to the detriment of existing shareholders, one of the bankers said.
The German chemicals giant has reportedly been considering a potential bid for Syngenta. This follows a private proposal from Monsanto [NYSE:MON] at CHF 449.15 per share that was rejected by the Swiss group.
An uninvolved lawyer pointed out that the German securities regulator, BAFIN, requires a disclosure for inside information only when plans are “sufficiently concrete”. This leaves BASF some headroom to analyse the situation before being forced to make an announcement.
The lawyer pointed out that BASF may be keen to avoid a disclosure as this in turn could risk triggering the Swiss “put up or shut up” mechanism.
BASF would have significant work to do in analysing a bid that would sit well with shareholders.
BASF trades at 15x LTM earnings and has a leverage ratio of 1.25x, while Syngenta trades at 25x and 0.89x. An all-share offer, based on an offer at Syngenta’s pre-rumour 7 May share price, would see BASF’s leverage (net debt/EBITDA) decrease from 1.25x based on LTM 1Q15 figures to 1.19x according to Dealreporter analytics.
BASF shareholders would be unlikely to vote for such a deal, the first banker said.
Monsanto’s offer was at a 35% premium to Syngenta’s pre-rumour CHF 332.7 trading price. Assuming a counter offer from BASF would be at a similar level, a 20% cash deal would result in a leverage level of around 2x. BASF has not made any public comments in its equity or debt reports on a desired level of leverage. A 40% cash component for an offer could push the ratio up to 2.5x.
The leverage levels of BASF peers include Linde (2.2x), Lanxess (1.7x), Akzo Nobel (1.3x), Arkema (2.4x), Solvay (.9x).
Ignoring synergies, a 100% cash deal is the only scenario in which such a deal would be accretive to BASF’s 2014 EPS, but it would push the net debt to EBITDA to over 4x.
At EUR 500m of synergies, the deal could be accretive at a cash 50% payout ratio. This would leave the combined entity with 2.6x-2.7x leverage, according to a calculation by Dealreporter.
Some reports have suggested BASF would be a white knight for Syngenta. Shareholders may also be keen to see the common strategic goals, rather than creating a larger conglomerate.
The first banker pointed out that buying Syngenta would be contrary to BASF’s stated strategy of servicing the seed industry players, rather than being one. This was behind the company's Becker Underwood acquisition. This banker pointed out that becoming a player in that sector would undermine that. “It would be a bolt from the blue, strategically.”
The tie-up may suit Syngenta’s management better, in terms of their own employment prospects, given the reduced overlap in Syngenta’s seeds business. That said, it would still need to closely analyse antitrust risk due to overlaps in crop protection, the bankers and a third banker said.
BASF would be at a disadvantage to Monsanto in its break fee discussions. The lawyer pointed out that German companies would typically be more conservative in break fee payments, typically only agreeing a fee in line with market practice. It would be hard to see a break fee agreed from BASF of more than 5%, the lawyer said. This compares to reports of a 10% break fee being negotiated on the Monsanto side. But, a BASF deal would also not be at risk of failing on tax inversion issues. It is not clear whether Monsanto’s proposal for Syngenta was conditional on a successful tax inversion.
The prospect of the Swiss Takeover Board imposing a “put up or shut up” (PUSU) deadline on a renewed bid from Monsanto is increasingly likely in the event of interest from a rival bidder, namely BASF, the first banker and a Swiss M&A lawyer said.
A second Swiss lawyer said the situation may not qualify for a PUSU given Monsanto’s first offer might be considered a merger proposal as opposed to a public offer.
The second Swiss lawyer said Monsanto’s announcement may not have been made formally and “publicly” enough to trigger a potential PUSU situation.