Bayer bid for Monsanto above USD 130 per share raises prospect of disposals
Need for shareholder approval limits scope to increase equity financing
Covestro, overlapping assets could finance increase
An increased offer from Bayer [ETR: BAYN] for Monsanto [NYSE:MON] at above USD 130 would likely need to be refinanced by disposals and potentially an accelerated exit from Covestro [ETR:1COV], according to bankers and shareholders.
On 24 May, Monsanto rejected Bayer’s proposed all-cash offer at USD 122 a share, deeming it “incomplete and financially inadequate”, but said it was open to discussing a potential path forward. Bayer is expected to come back with an improved offer.
One Bayer shareholder cited talk that Bayer is considering an improved offer at USD 130 per share if granted access to Monsanto’s books.
A spokesperson for Bayer declined to comment.
There is a limit to how much Bayer could raise its offer, since the company has a threshold at 25% of the current share capital to raise equity, one banker said. Bayer would want to stay below this threshold to avoid a shareholders vote, he pointed out.
According to Bayer’s 2014 AGM circular, the company was “granted permissions until April 2019 to raise capital stock by issuing additional shares of up to 25% of the existing 826.95m shares outstanding, reflecting a potential issuance of 207.0299m new shares”.
Bayer has already said that the expected equity financing of its proposed bid for Monsanto represents approximately 25% of the transaction’s enterprise value and is expected to be raised primarily via a rights offering. The company also stressed that the offer would not be subject to its shareholders’ approval.
In the absence of additional equity, Bayer shareholders will balk at the level of debt required to get to above USD 130, a second banker warned.
If Bayer were to raise the bid to USD 130 per share, this implies an enterprise value for Monsanto of EUR 58.78bn, (based on an exchange rate of 1 USD = 0.907606 EUR). Based on a Bayer share price of around EUR 87.64, raising 25% of this value with a rights issue, and within Bayer’s current authorisation, would require the rights issue to be priced at a maximum 15.8% discount to TERP, according to Dealreporter analytics.
Based on an average 28.96% discount to TERP for M&A intended rights issues since February 2014, Bayer could raise EUR 12.02bn via the rights issue, reflecting 20.45% of the enterprise value at USD 130 per share, and would need EUR 46.76bn in debt financing. This would result in combined net debt/EBITDA of 4.81x, before synergies.
Bayer sought to reassure shareholders during its management roadshow that it will remain price disciplined in its pursuit of Monsanto, as reported by this news service.
The company continues to stress that disposals will not be required to finance the offer, and press reports have stated that Bayer has already secured USD 63bn in debt financing for the offer which, can be increased if it opts to raise its offer.
On May 24, Moody’s placed Bayer’s A3 credit rating under review for downgrade in the light of the group’s announcement to acquire Monsanto.
The rating agency said that despite Bayer's intention to finance approximately 25% of the transaction's enterprise value with equity primarily via a rights offering, Moody's believes that the offer signals a step change in Bayer's financial policy. Financial leverage will increase sharply post-closing, with total debt to EBITDA likely to rise close to 4.5x, on a Moody's adjusted and pro forma basis (that is, including a full-year contribution from Monsanto).
But Bayer could finance a higher bid using proceeds from divestitures that would be required to appease antitrust regulators, the shareholders and the bankers agreed. It is most likely that the divestitures would come out of Bayer's seed/herbicides business, an industry analyst said. If necessary, Bayer could divest the entire unit so that Monsanto's market share in herbicides, including the Liberty herbicide and Liberty link trait, wouldn't change at all as a result of the transaction, he commented.
Should Bayer bid above USD 130, it would certainly raise the prospect of disposals, the first banker said. A bid at USD 130 plus could accelerate its exit of Covestro or other assets in its portfolio, he added.
Bayer owns approximately 64% of Covestro shares, worth EUR 4.9bn at the current market price.
Bayer has indicated it does not want to own Covestro for the long haul, the second banker emphasized.
Covestro’s shares have jumped in the wake of the Monsanto talks, which seems to indicate that the market thinks Bayer could potentially sell the business to finance the acquisition.
That business would generate some interest, even though it is pretty commoditized, this banker believed.