Some Investors Have Limited Taste for Sweeter Bayer Bid for Monsanto
The company’s $62 billion takeover bid was rejected by Monsanto on Tuesday
FRANKFURT—While Bayer AG is considering how to respond to Monsanto Co.’s rejection of its $62 billion takeover bid, investors and analysts are questioning whether the German pharmaceutical and chemicals giant can up its offer.
Some of Bayer’s investors said Wednesday the all-cash, $122 a share bid for the U.S. agrochemicals company, confirmed on Monday, was already a stretch. These investors said Bayer isn’t in a position to increase its bid materially because its share price has plummeted more than 12% since news of a takeover surfaced last week.
Bayer’s shares closed at €87.15 on Wednesday.
The company now must formulate a slightly higher bid that pleases both Monsanto and its own skeptical investor base if it is to clinch a deal that would create the world’s largest agrochemical business, according to investors and analysts.
Monsanto, the world’s top seed producer, said Tuesday that Bayer’s proposal “significantly undervalues” the company and is “financially inadequate.” However, Monsanto Chief Executive Hugh Grant added that there could be “substantial benefits” to a tie-up with Bayer and the company was open to further discussions.
Bayer, a leader in crop chemicals, responded by reiterating its $62 billion bid, while expressing confidence it could address Monsanto’s financial and regulatory concerns to complete a transaction.
“Bayer remains committed to working together to complete this mutually compelling transaction,” Bayer Chief Executive Werner Baumann said in a brief statement Tuesday night.
Mr. Baumann, a 28-year Bayer veteran who stepped in as chief executive just over three weeks ago, has been trying to convince investors of the deal’s merits. Bayer’s shares rose to as much €87.91 Tuesday from a low of €84.
At a lunch meeting with several investors in London on Tuesday, Mr. Baumann characterized the deal as the last crucial step in the global consolidation of the agrochemical industry, which he said could solidify the sector for decades, according to people familiar with the matter.
These people said Mr. Baumann also responded to investors who would have preferred a large pharmaceutical-sector acquisition, saying most available targets wouldn’t significantly improve Bayer’s pipeline and cash profile.
Analysts and investors said Bayer might have to raise its offer to at least $135 a share to interest Monsanto, forcing the German company to enact a much higher capital increase than it initially suggested.
Such a move likely wouldn’t require Bayer to seek shareholder approval for a bid. Bayer’s Board of Management can issue up to 35% of Bayer’s outstanding capital to shareholders for cash without seeking approval from shareholders, according to a resolution at the company’s shareholder meeting last year. The company can additionally issue convertible bonds.
Bayer’s said it would finance its current bid, which values Monsanto at a 37% premium over its closing share price on May 9, with a combination of debt and equity, including a share sale worth around 25% of the total transaction value. That means the company would launch a capital increase of around $15.4 billion. Bayer’s market capitalization is $80 billion.
It is unclear whether Bayer would be able to secure shareholder approval, if ultimately needed. Since Bayer confirmed last week that it was pursuing an acquisition of Monsanto, investors have voiced skepticism not just about the price but also about whether such a move would pull the company too far away from its health-care roots in the interest of its crop-science business.
“It’s a concern that crop science would become a very large part of the company,” said Markus Manns, a portfolio manager at Union Investment, a Bayer shareholder. Mr. Manns said Bayer’s pharmaceutical and over-the-counter drug businesses were more attractive to investors because the agrochemical division tended to be more volatile.
Bayer investors, including Union, have acknowledged the strategic rationale for a tie-up with Monsanto, which would strengthen Bayer’s presence in the seed business, but most question the size of the target. “If Bayer were to find a ‘mini-Monsanto’ it would make more sense,” Mr. Manns said.
“Monsanto is a good company and the deal seems to be a good fit, as both companies have a strong position in different markets and different product ranges that complement one another,” said one Bayer investor, who declined to be identified. But, the person added, the current price is “quite high” and “Monsanto is so big that it might be hard to integrate the company.”
If a deal was completed, Bayer’s crop science business would comprise around half of the company’s total revenue, according to analysts. Bayer’s agrochemical division posted revenue of €10.37 billion last year, out of total group sales of €46.3 billion.
Analysts have suggested that a potential deal could signal a shift in Bayer’s investor base, which tends to be more focused on its lucrative pharmaceuticals business.
Former Bayer Chief Executive Marijn Dekkers, who stepped down at the end of April, built up the company’s health-care profile by presiding over the launch five new blockbuster drugs and the $14.2 billion acquisition of U.S.-based Merck & Co.’s consumer care business.
At the same time he sought to focus the company more squarely on its so-called life-science businesses, including health care and the agrochemicals business. As part of that effort, Mr. Dekkers late last year spun off part of the group’s specialty plastics business, now known as Covestro AG.
Bayer’s bid for Monsanto comes after major deals were struck in recent months by rival seed developers Syngenta AG, Dow Chemical Co. and DuPont Co. Analysts have concluded this would be Bayer’s last chance to participate in the agrochemical deal making frenzy.