Bayer chief seeks to feed the world with $66bn Monsanto deal
Werner Baumann is confident of takeover rationale, but has yet to win over critics
To help justify one of the biggest bets in German corporate history, Werner Baumann is banking on some really bad weather.
The chief executive of Bayer is proposing to create a global powerhouse in agricultural supplies by acquiring rival Monsanto for $66bn, at a time of low grain prices and reduced spending by farmers on seeds and crop sprays.
But he is confident the downturn is temporary, and the favourable weather that has led to bumper harvests in recent years will soon be a thing of the past. “Our underlying assumption in this industry is that after good weather you always have bad,” he says.
That will lead to “normal or weak harvests”, a more balanced supply and demand picture, and ultimately higher commodity prices, adds Mr Baumann.
He may be too optimistic. “Weather is the most unpredictable area of our sector and cannot be forecast long term,” says Allister Phillips of Phillips McDougall, an agrichemicals consultancy.
Others agree. Bayer’s hopes of an upturn in the agricultural cycle “could be wishful thinking”, says Markus Manns of Union Investment, a Bayer shareholder.
Yet Mr Baumann has a much longer-term perspective. His horizons extend far beyond the current trough to a future of rising populations and increased pressure on farming.
It is a scenario where agricultural output will have to rise 60 per cent to feed a world population projected to reach 10bn by 2050, he says. A tie-up between Germany’s Bayer and Monsanto of the US — combining their respective strengths in crop sprays and seeds — could provide the necessary tools to achieve that output goal, he adds.
While many are sceptical about an acquisition that would be the largest in German corporate history, others are impressed by the scale of Mr Baumann’s vision. “There’s no immediate short-term benefit to Bayer from the Monsanto takeover, in terms of cash flow,” says Christian Faitz, analyst at Kepler Cheuvreux. “But Baumann isn’t thinking about the next couple of years. He’s thinking of the next few decades.”
The Bayer boss’s steely conviction that buying Monsanto is the right thing to do has helped him withstand a tidal wave of criticism. Investors, who sent Bayer’s share price down 8 per cent when it revealed its initial bid for Monsanto in May, worried the company was paying too much, and that the deal would skew it away from pharmaceuticals, its core business.
Green groups vilified Bayer for pursuing a company they see as evil incarnate, a pioneer of genetically modified crops and “Frankenfoods”. Farmers’ groups and politicians worried the tie-up would reduce competition and lead to higher prices for seeds and crop sprays.
Such concerns have become increasingly urgent in view of the other big deals reshaping the agribusiness sector — Dow Chemical’s $130bn combination with DuPont, and ChemChina’s $44bn takeover of Switzerland’s Syngenta. The megadeals would reduce the number of global groups in the industry from six to four.
That is why all of them will come under intense scrutiny from antitrust regulators. In a troubling sign for Bayer, the European Commission announced in August it was launching an in-depth investigation into the Dow-DuPont tie-up.
Shortly afterwards, Syngenta admitted its deal with ChemChina would not now close this year, as previously anticipated, due to a “significant escalation” in information demanded by regulators.
Mr Baumann dismisses fears that regulators could nix Bayer’s takeover of Monsanto, which valued the US company at $66bn including debt. “There is very little overlap between us,” he says. “We’re not only complementary from a product portfolio perspective, but also in terms of geography.”
Also, with a combined €2.5bn research and development budget, the biggest in the sector, there would be more potential for innovation, not less, he adds.
But there is no doubt concern about the regulatory hurdles weighing on Bayer’s share price, which has been trading lower than when rumours of its talks with Monsanto reached the market in May.
“I don’t know what I’m buying in Bayer — is it a pharma group or a crop science company?” says Mr Manns. Monsanto is also trading at well below Bayer’s $128 per share offer price, suggesting scepticism that the deal will be completed.
Other factors at play include concern about the future of Bayer’s pharma business — a big negative for a company that invented the aspirin and modern blockbusters such as the blood-thinning drug Xarelto.
“People believe Bayer’s pipeline to be relatively weak,” says Tim Jaksland, analyst at Carmignac. “It might not be good enough to replace the current portfolio.” There is particular concern, he adds, about what will happen after 2024 when the patent for Xarelto expires.
Mr Baumann dismisses those concerns. The company’s pharma division has experienced a period of “fantastic growth” driven by Xarelto, the eye medicine Eylea and other products such as cancer drug Stivarga, which has “quite a bit of momentum for many years to come”. It also has six product candidates in its pipeline — which include drugs for chronic heart failure, kidney disease and prostate cancer — with a “peak sales potential of at least €6bn”.
There is, he acknowledges, “one caveat”: “within the next years after Monsanto, we won’t have the financial means to go after large-scale M&A” in pharma.
Another possible storm cloud — a small contraction in the market for genetically modified seeds, a niche Monsanto has long dominated. Global planting of GM crops fell slightly in 2015 after years of strong growth, and Phillips McDougal is forecasting small declines in the market this year and next as crop prices remain low. Could the GM market be saturated?
Mr Baumann says it is wrong to focus on the GM side of Monsanto’s business. Bayer is, he adds, “not interested in pushing a particular technology” but combining different approaches to achieve better harvests.
There is also the prospect of new markets — for example, China.
The authorities there have banned GM crops: but the ChemChina-Syngenta deal could encourage a new openness towards this technology and others, says Mr Baumann. “Syngenta provides that access, and the whole industry would then benefit from a corresponding [change in the] regulatory environment,” he adds.