MergerMarket
* Raising equity dubbed “offensive” on present terms
* Monsanto’s Glyphosate risk looms over bid valuation
* Approach viewed as possible gambit to secure crops JV
Bayer [ETR: BAYN] would likely struggle to secure shareholder backing for an increased bid for Monsanto [NYSE:MON], according to a top-20 and two further shareholders in the German life sciences group.
The second and third shareholders said they would not back a rights issue to finance a higher offer for the US crop sciences giant.
“We are backing the rights issue only within the current parameters. But we won’t support it in the event of an increase of price, so management should keep this in mind when reviewing the offer,” the second shareholder said.
On 24 May, Monsanto rejected Bayer’s proposed all-cash offer at USD 122 per share as it was deemed “incomplete and financially inadequate”, but the company remains open to discussing a potential path forward. Bayer said it planned to finance around 25% of the USD 62bn acquisition consideration via a rights issue.
Monsanto may be amenable to a deal, indicated one US sector banker. Monsanto knows we are at a low point in the agricultural cycle, which is why it bid for Syngenta [VTX:SYNN], he pointed out. This banker estimated that Bayer would need to offer at least the same as ChemChina is paying for Syngenta for its bid to be successful, estimating a bid in the range of USD 130-USD 140 per share. ChemChina’s bid for Syngenta values the Swiss company at 17x EV/EBITDA.
But Bayer investors are “very unhappy” about the German company’s stock price fall since Monsanto bid talk emerged and already consider equity raising on the proposed terms “offensive”, the third shareholder said.
The current offer at USD 122 is a fair price with a good premium on offer, so Bayer management should not improve its offer, the second shareholder said, adding that there was absolutely no room for increase.
Even at the current terms, “I’d be diluted down […] I’m not giving them more money,” the third investor said.
The first, top-20 shareholder said Bayer should not increase its bid. But he conceded he might be able to support an increase if Monsanto gave assurances of its support for the approach.
It is premature to speculate on shareholder sentiment, a person familiar with Bayer’s position said.
Product mix headache
Bayer shareholders have also expressed their concerns around Monsanto’s product mix, with a particular focus on herbicide Glyphosate, the second and third investors said. This product is enduring a difficult progress towards relicensing in the European Union, as reported.
The Glyphosate product may be withdrawn from sale in Europe and this situation is just one signal of potential underlying problems with Monsanto’s business, these shareholders concurred.
Monsanto could not immediately be reached for comment.
A joint venture with Monsanto in the crop sciences space would still be a suitable end scenario, all the shareholders agreed.
One way that Bayer’s bid for the whole of Monsanto might make sense is if the US group is dragging its feet on a JV, the third shareholder suggested. This could be Bayer’s gambit to bring Monsanto to the table to ink a deal on the venture, he reasoned. There is otherwise no rationale for trying to buy the whole business and diluting its healthcare operations, he added.
It does not make much strategic sense to keep Bayer’s crop sciences activities under its banner, the second shareholder said. Monsanto may be better placed to manage these assets, he argued.
If this is the case, new Bayer CEO Werner Baumann may be “smarter than we think,” the third shareholder said. Baumann took up the post earlier this month. His move for Monsanto represented a very sudden shift in strategy, all three shareholders agreed.
Bayer should have focused on selling its remaining 69% stake in specialiy chemicals player Covestro [ETR:COV] and finding a solution for crop sciences assets before moving for a pharma acquisition, the first shareholder said.
The German group had space to do work internally to boost pharma margins, the third shareholder added. Diluting down its pharma capability with a full takeover of Monsanto would be “permanently damaging” to the stock, he argued.
Bayer declined to comment.
Should the full takeover of Monsanto not materialise, it would be beneficial for Bayer shareholders in the long run because the share would re-rate, the first and third shareholders said. However, this would be a big hit for Monsanto investors, who will have to face another failed transaction after Syngenta [VTX:SYNN], the first shareholder said.
Bayer’s shares were trading at EUR 100 before rumours of its approach emerged. The stock closed today (Wednesday) at EUR 87.15.