Overview of the deal
Acquirer: Bayer
Target: Monsanto
Estimated value: $66 billion
Announcement date: May 2016
Acquirer Advisors: Credit Suisse, BofA Merrill Lynch, Rothschild
Target Advisors: Morgan Stanley, Ducera Partners
The deal fundamentally changes Bayer’s business, because its Agribusiness will replace healthcare as its biggest revenue earner. But Monsanto’s focus on genetically modified crops has put the deal under scrutiny in Europe, where such crops are viewed with deep suspicion. However, in mid-March 2018 the EU competition regulator approved Bayer’s $66 billion takeover, after Bayer agreed to sell vegetable seeds, pesticides and digital agriculture technology to BASF SE. This required selloff was to ensure that farmers will still have the choice of different seed varieties and pesticides at affordable prices.
Through this acquisition, Bayer gets access to, in the words of Bloomberg, “more than 2,000 varieties of seeds for crops such as corn, soybeans, and wheat.” Bayer had already developed seeds for rice, cotton, and oilseed. It will now expand its varieties significantly due to the acquisition. It will also be the largest all-cash transaction on record, ahead of brewer InBev's $60.4 billion offer for Anheuser-Busch in 2008.
"We have approved Bayer's plans to take over Monsanto because the parties' remedies, worth well over €6 billion, meet our competition concerns in full. Our decision ensures that there will be effective competition and innovation in seeds, pesticides and digital agriculture markets also after this merger. -European Commision
Company details (Bayer Corporation)
Bayer Corporation, together with its subsidiaries, manufactures health care products, agriculture products, and high-tech polymer materials. Its health care products include animal health products, pharmaceuticals, consumer care products, and diabetes care products.
- Founded in 1863, headquartered in Leverkusen
- President and CEO: Werner Baumann
- Number of employees: 99,820
- Market Cap: $77.52bn - EV: $82.78bn
- LTM Revenue: $35.02bn - LTM EBITDA: $8.99bn
- LTM EV/Revenue: 2.36x - LTM EV/EBITDA: 9.21x
Company details (Monsanto)
Monsanto Company, together with its subsidiaries, provides agricultural products for farmers worldwide. It operates in two segments, Seeds and Genomics, and Agricultural Productivity.
- Founded in 1901, headquartered in St. Louis
- CEO: Hugh Grant
- Number of employees: 24,100
- Market Cap: $52.46bn - EV: $57.25bn
- LTM Revenue: $14.65bn - LTM EBITDA: $4.14bn
- LTM EV/Revenue: 3.91x - LTM EV/EBITDA: 13.83x
Projections and assumptions
Short-term consequences
Bayer has made an all-cash offer to acquire all of Monsanto´s stock for $122 per share, making up a total value of $66 billion. In order to finance the deal, Bayer is aiming to raise $19 billion by issuing convertible bonds and new shares to existing shareholders as well as a $57 billion bridge-loan. Bayer has expressed a strong belief in the strategic rationale of the deal and is paying an 18.6x EV/EBITDA multiple. A successful integration of Monsanto is likely to enable cost synergies of up to $1.9bn, which will be key to increasing free cash flow.
The impact on Bayer's business profile will be quite significant. Bayer is shifting from a health-care orientated company towards the cyclical agri-business. The seasonal fluctuations are partially offset, however, due to diversification and better scale. The deal will create a company commanding more than a quarter of the combined world market for seeds and pesticides in the fast-consolidating farm supplies industry. In addition, Bayer will be the world´s largest seed company, the world's largest owner of the intellectual property and patents for herbicide tolerant seed traits and finally also the largest researcher into seeds traits. Another massively important part of the deal is about Big Data. The acquisition enables Bayer to become a major player in agricultural Big Data, leading a pack that also includes other agrochemical giants like Dow-DuPont and Syngenta.
Long-term upsides
The consolidation of the world’s seed, chemical and fertilizer industries over the past two decades is a direct response to the agricultural economy that has been slumping. As a result of this, commodity prices have fallen sharply, and farmers have less to spend on supplies and biotech seeds. Still, from 2006 to 2015, costs grew at an average annual rate of 8.1% for fertilizers, 5.7% for pesticides, and 11.3% for seeds. The majority of seed, chemical, and fertilizer companies have not been able to create enough innovative new products to counteract this trend. Hence, it is their objective to consolidate further, hoping to cut costs and keep profits high.
The market for digital-based agricultural services is expected to reach $4.55 billion by 2020. Monsanto paid $1.1 billion for a big data company that monitors weather to provide farmers insurance and runs simulations prior to planting. Big data allows for accurate crop predictions without planting a single seed. These advanced data analytics allow farmers to start and harvest their crops at optimal time, thus, maximizing crop yields and minimizing waste. Additionally, big data is already being used to chemically engineer plants that can be grown everywhere, which could in turn bring a sustainable solution to put an end to world hunger in the future.
Risks and uncertainties
The European Commision approved the deal after Bayer promised to divest some assets and license some of its technologies to rivals. Having considered Trump administration's focus on trade competition, the Bayer acquisition is as unwelcome to the U.S. as it is acceptable to the European Commision. Moreover, there is still a concern about competition policy as this merger will allow Bayer, Monsanto and BASF to create farm-data collection platform. The new company would become the largest agribusiness on the planet, selling 29% of the world’s seeds and 24% of its pesticides.
The new agricultural giant may have outsize political power to lobby for policies that benefit themselves at the expense of consumers and farmers, which eventually may monopolise the agriculture as well as the food sectors. Another concern is that if these handful of giant companies face less competition, they may face less pressure to innovate. The innovation in crop yields is the key to help feed a rapidly growing world’s population. Taking into account other companies that have consolidated, they have spent less on research for smaller crops and steered toward big blockbuster profits with commodity crops such as corn or soy.
“The $66 billion deal creates an incredible concentration in the seed and pesticide markets...it would concentrate too much power over the global food supply in the hands of a few giant corporations.” -Bloomberg
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