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Why Bayer's Bid for Monsanto is Bad News for All Parties

By Rich Duprey - May 24, 2016 at 8:15AM

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The big $62 billion question is who really wants this deal to happen?

German agrochemical company Bayer has planted the seeds for a controversial takeover effort of seed giant Monsanto. Image source: Monsanto.

Bayer (BAYR.Y -1.03%) has decided upon a "damn the torpedoes" approach with its unsolicited takeover bid for Monsanto (MON), offering $62 billion in cash for the agrichemicals company, or $122 a share, a proposal that represents a radical shift from Bayer's primary focus on healthcare to one that plunges it deeply into the divisive world of genetically modified organisms.

It's also one likely to upset its own shareholders.

Analysts are skeptical about the value of the deal, even if the motivating force behind the offer makes sense, which hasn't been firmly established. Although Bayer hinted in its April earnings conference call with investors that it wanted to bulk up its seeds business, the size of the offer has many thinking the company is stretching its finances too thin and putting its A-rated credit at risk. One analyst says this initial offer is already at the upper boundaries of propriety for Bayer, but it's not likely to remain there and will need to be increased, raising doubts about its efficacy.

There may be something to that. While Bayer says the $122 a share bid is a 37% premium to Monsanto's stock price prior to speculation about a merger making the rounds, the agrichemical giant's stock had fallen some 25% from where it traded a year ago. Bayer is essentially offering no premium to that price.

Of course, in that time frame, Monsanto has suffered a string of setbacks, including its failed acquisition of Swiss chemicals company Syngenta (NYSE: SYT), which subsequently agreed to be bought by China National Chemical. It upset commodities traders representing the likes of Archer-Daniels Midland, Bunge, and Cargill by plowing ahead with a decision to sell GMO soybeans in foreign markets without obtaining the necessary permissions to first do so. It has battled with farmers in Argentina over royalty payments for soybeans, and with the government of India over price controls on its cotton seed. And, it cut its earnings guidance for the current quarter and the full year.

Bayer says it will finance the merger with a combination of debt and equity, with the equity portion representing about 25% of the value, primarily through a rights offering, and it anticipates the deal will witness earnings per share accretion in the mid-single-digit percentage range in the first full year after the acquisition closes. In subsequent years, Bayer sees it providing double-digit percentage earnings accretion, and after three years, it will begin seeing some $1.5 billion in earnings contributions from "synergies" realized from the deal.

However, many remain skeptical the deal will happen in the first place, and though Monsanto's stock has jumped since the proposals were first made, it's still trading well below the offer price. Shares of Bayer, on the other hand, have fallen ever since the merger rumors first popped up.

That may be because Bayer's shareholders don't like what is seen as empire-building by the German company's new CEO Werner Baumann, who's only been on the job for three weeks. Reuters reported Henderson Global Investors called the merger an "immediate destruction" of value, while an analyst said he was having difficulty finding an investor who supported the plan.

Bringing Monsanto into the fold would also make Bayer the lightning rod for protesters who oppose GMOs and regularly launch demonstrations against the company. It's been reported Bayer would likely do away with the Monsanto name to try to hide the nexus between it and the reviled company.

Still, the deal would first have to get through the labyrinthine maze of regulatory approval. Although there isn't much overlap between the two companies' businesses, the wave of consolidation that's occurring in the agrichemical industry, particularly with Syngenta being bought by ChemChina and Dow Chemical and DuPont agreeing to merge, means a Bayer-Monsanto tie-up would result in 83% of U.S. corn seed production and 70% of the global pesticide market being controlled by these three companies. For that reason, trade regulators are likely to examine all three deals more closely in terms of how they'll impact competition.

The one unifying theme of Bayer's bid for Monsanto seems to be that it's one designed to make nobody happy.

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