Tara Lachapelle is a Bloomberg Gadfly columnist covering deals. She previously wrote an M&A column for Bloomberg News.

Bayer, the German pharmaceutical company best known for aspirin, is once again talking up its desire to expand in health care for animals. If it wants to do so in a big way, $24 billion Zoetis is the obvious choice. But will a deal finally happen, and is it the right move?

Hole in the Portfolio
Products for pets and farm animals made the smallest contribution to Bayer's 2015 revenue, and operating profit wasn't even broken out separately. Now the company wants to beef up that division.
Source: Bloomberg

Bayer has missed out on several deals for animal-health businesses, a sub-industry that's been playing a global game of musical chairs for years. Quick recap: Pfizer spun off Zoetis in 2013. Boehringer Ingelheim is in the process of acquiring Sanofi's Merial unit, and Eli Lilly bought assets from Novartis more than a year ago. Before that was Merck's 2009 purchase of Schering-Plough that boosted Merck's animal-health exposure. (Bayer had bid for Schering-Plough's unit, but lost out after Merck decided to keep it. Merck then appeased regulators by letting Sanofi take control of their Merial joint venture.)

Now, after all those transactions, Bayer is left looking small by comparison.

Animal Instincts
Pfizer's spinoff three years ago of Zoetis, the leader in animal health, spurred more industry consolidation. Will Bayer strike next?
Source: Bloomberg, company filings
*Estimate from company to include Merial, the business Sanofi is selling to Boehringer in exchange for its consumer unit. **Includes the Novartis animal-health unit acquisition that Eli Lilly completed in January 2015.

Given the relative size of Bayer's unit, at first blush it looks more like a candidate to spin off than build upon. However, CEOs past, present and future have been keen on the latter. Werner Baumann, who will take the helm in May from Marijn Dekkers (who is leaving to become chairman of Unilever), plainly signaled this week at a briefing in Germany that this, too, is where his dealmaking ambition lies: 

"We would really, really like to strengthen our animal health business...We think the animal health area is highly attractive even if it is a relatively small industry."

It makes sense. This is an area of growth and one that differs from human pharmaceutical products, in which companies undergo an expensive and laborious process of hunting for high-margin blockbuster treatments. And even after all the deals that have taken place, good assets are still available.

Eli Lilly is separating the manufacturing for its animal-health drugs from its human drugs, which could be a precursor to the company spinning off the unit. And then there's also the ongoing speculation that Merck could follow in Pfizer's breakup footsteps.

But if Bayer wants to have a strong position in this space, at this point, go big or go home. That means Zoetis. It's a company whose sales analysts project will grow at around 5 percent a year for the next few years, although Zoetis said that changes it's making -- such as SKU reductions -- will mask operational growth in 2016. Shares of Zoetis also command a far richer multiple than Bayer's do.

Zoetis Independence
Zoetis shares have risen more than 80 percent since separating from Pfizer in early 2013. That's twice as much as the S&P 500 gained over that span, and also tops the average rise in pharma stocks in the index.
Source: Bloomberg

The big question is affordability. Converted to U.S. dollars, Bayer is valued at about $99 billion, has $20.8 billion of debt and only $2 billion of cash. Net debt is equal to 1.8 times the Ebitda it generated last year. In other words, it may need to sell something else to make a purchase as large as Zoetis. Could that something be crop science? According to a Reuters report last month, Monsanto -- after being rejected by Syngenta -- is interested in Bayer's crop-science unit and has approached the company about it.

For Syngenta, Monsanto was willing to pay about 3 times revenue, which is also the median multiple for $10 billion-plus acquisitions announced during the past 12 months. That would imply more than $30 billion for Bayer's crop-science business. And enough for Zoetis, which would cost a little more than $30 billion with a typical takeover premium.

Baumann said there's no urgency to do a deal and that Bayer would consider partnerships or joint ventures as well. He also said that if Bayer fails to bolster its animal-health presence, then it may consider selling or spinning off the unit, as it did with the plastics business.

But if it's serious about this market, buying Zoetis is probably the way to go. It just comes down to where Baumann gets the money. 

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Tara Lachapelle in New York at

To contact the editor responsible for this story:
Beth Williams at