Bayer AG (BAYN) – market cap as of 24/09/2016: $84.86bn
Monsanto Company (MON) – market cap as of 24/09/2016: $45.31bn
Introduction
On September 14, following months of negotiations, Bayer and Monsanto agreed on a final merger agreement. Bayer will pay $57bn to Monsanto’s shareholders, and will take on $9bn in Monsanto’s debt.
The deal represents the largest and latest merger in a wave of consolidation that for the past 10 months has been affecting the global market for crop seeds, pesticides and fertilizers. Mergers represent a good way to cut costs, while integrating the development of new seeds and chemicals.
The deal is expected to close by the end of 2017.
About Bayer AG
Bayer AG is a German multinational company founded in 1863 and focused on healthcare and agriculture.
The company, which has historically been very active in terms of M&A activity, has recently undergone an important restructuring. In January 2016, Bayer spun out its Material Science division into a new publicly traded company called Covestro AG, of which it still owns 69%, and split its core business into 3 divisions: Pharmaceuticals, Consumer Health and Crop Science, which includes also the Animal Health business unit.
In 2015, Bayer reported Sales for €46.3bn (a 12.1% increase compared to 2014), 30% of the which come from Europe, 29% from Latin America, 26% from North America and 15% from Asia-Pacific, and an EBITDA of €10.2bn (a 18.2% increase compared to 2014).
About Monsanto Company
Monsanto is an American agrochemical and agricultural biotechnology company founded in 1901 and headquartered in Missouri. It was originally founded as an industrial chemical company, but in the 1980s it shifted its focus and was one of the first companies to apply the biotechnology business model to agriculture.
Monsanto’s business is currently structured in two segments: Seed and Traits, which also includes genetic technology platforms (biotechnology, breeding and genomics) and Crop Protection, which consists of herbicide products.
Monsanto is heavily investing in R&D: in the last fiscal year the company reported spending $1.5bn in research and development, the majority of which oriented to bring innovations in the sectors of biotech, breeding and genomics.
In 2015, Monsanto reported $15bn revenues (a 5% increase compared to 2014), an operating income of $3.5bn (11% increase compared to previous year) and $2.3bn net income (16% increase compared to 2014).
The Seed and Traits segment accounts for 63% of net sales (and within this segment, 53% is due to corn) and Crop Protection for the remaining 37%. From a geographical point of view, more than half (57%) of Monsanto’s revenues are from the US and the geographical complementarity with Bayer could indeed contribute to the creation of important synergies.
Deal structure
After several months of wrangling and three unsuccessful bids, Bayer and Monsanto announced on September 14 that they reached a definitive combination agreement. Bayer will buy Monsanto’s shares at $128 per share in an all-cash transaction. With respect to Monsanto’s closing share price on May 9, 2016, the day before Bayer’s first bid, the offer comprises a 44% premium. The deal involves a total cash consideration (Equity Value) of $57bn and a record Enterprise Value of $66bn after adding Net Debt (Implied LTM EV/EBITDA 18.6x as of May 10, 2016).
Monsanto’s Board of Directors, Bayer’s Board of Management and Bayer’s Supervisory Board have unanimously approved the transaction. However, the deal still has to be approved by Monsanto’s shareholders and, most importantly, it needs to pass the antitrust review. Therefore, the agreement includes a reverse breakup fee of $2 billion that Bayer will pay to Monsanto in case the regulatory authorities decide not to approve the business combination. Both companies intend to work with regulators in order to guarantee a successful closing, which is expected to happen by the end of 2017.
Bayer plans to finance the acquisition with a mixture of debt and equity. The definitive equity part, consisting of ~$19bn, will be raised via (i) a convertible bond issue and (ii) a rights issue. In the meantime, a record bridge facility of $57bn is committed by a pool of five banks (BofA Merrill Lynch, Credit Suisse, Goldman Sachs, HSBC and JP Morgan).
Deal rationale
The merger between Bayer and Monsanto realizes a shared vision of integrated agricultural offering delivering enhanced solutions for growers, and creates a leading innovation engine for the next generation of farming. The deal reinforces Bayer as a global innovation-driven Life Science company and is expected to deliver significant value creation through considerable synergy potential, resulting in strong core EPS accretion in the third year after closing.
From a value creation standpoint, the combined business will be well positioned to benefit from the agro market upswing, primarily driven by declining yields (-17% by 2050 as a result of climate change shocks) and hectares of farmland (-17% per capita by 2050), as well as by upward trending demographic trends. Bayer foresees a required 60% increase in agricultural productivity by 2050 in order to feed the planet, and estimates a ~€120bn agriculture inputs market by 2025. Expected net EBITDA synergies of ~€1.5bn (confirmed in due diligence) will materialize in the first full year after the closing of the transaction, of these, approximately 80% (~€1.2bn) will result from cost savings. Bayer expects to realize substantial SG&A savings (~70% of total cost synergies) through the integration of country platforms and IT landscapes and the overlapping of marketing and sales functions. Further savings will come from R&D (e.g. trait research) as well as COGS (e.g. from overlap in supply function and procurement spending). Initial sales synergies (~€0.3bn) will result mainly from broader product variety, however, these are expected to expand in the mid to long term from integrated solutions (i.e. smart combinations and innovation of integrated systems).
As pointed out above, the deal creates a leader in Life Science with a balanced product portfolio, wide geographic footprint, and enhanced presence in the U.S. Bayer’s 2015 pro-forma sales including Monsanto amount to €47.1bn (against €34.3bn stand-alone), split evenly between Healthcare (49% against the 67% stand-alone) and Crop Science (49% against the 30% stand-alone, with ~55% coming from Crop Protection products and ~45% from Seeds & Traits). From a geographical standpoint, 46% of Crop Science sales would be generated in the U.S. (~€10.5bn), 25% in Latin America (~€5.8bn), 20% in Europe (~€4.7bn), and 9% in Asia Pacific (~€2.1bn).
The transaction is expected to be accretive to core EPS in the first full year after closing, with double-digit figures from year three onwards.
The primary obstacle to the deal remains regulatory approval, which is needed by as many as thirty distinct regulatory agencies in both the U.S. and Germany. During the conference call held by Bayer on September 14, day of the signing of the agreement, Bayer’s CEO Werner Baumann affirmed that so far both companies have been receiving “encouraging feedback” from regulators, although they are only now starting formal discussions.
Market reaction
In the trading days following the announcement, Monsanto’s shares plunged approximately 5% to a minimum of $101.8 on September 19. On Friday September 23, the shares closed at $103.5, implying a ̴20% discount with respect to the offer price. Bayer’s share also suffered, dropping 2.36% on the day after the announcement. This lack of market enthusiasm is a clear signal that traders and investors remain skeptical that the deal will close.
Advisors
Credit Suisse, Bank of America Merrill Lynch, and Rothschild are advising Bayer, while Monsanto is being advised by Morgan Stanley and Ducera Partners LLC.
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