Deals

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

Chris Hughes is a Bloomberg Gadfly columnist covering deals. He previously worked for Reuters Breakingviews, as well as the Financial Times and the Independent newspaper.

A Monsanto takeover would be a big stretch for Bayer. Fortunately, this isn't a deal the German company has to do.

Bloomberg News reported Thursday that the $90 billion inventor of aspirin is weighing an offer for all of Monsanto, after previously holding discussions with the U.S. seed giant about possible asset sales and partnerships. The discussions are preliminary, but the mere fact that Bayer is even considering a deal of this magnitude reflects a new reality for the crop-protection industry, where bigger is better.

Bayer's crop-sciences business isn’t small , with about 10.4 billion euros ($11.5 billion) in revenue last year. Still, the company is about to find itself in a much weaker position after an unprecedented wave of consolidation in the agricultural industry. ChemChina is acquiring Swiss pesticide-maker Syngenta for $46 billion and U.S. rivals Dow and DuPont are merging. While Bayer's crop-sciences unit has more often been cast as a potential target, the company has said it intends to hold onto it.

Bayer's Businesses
The company's crop-sciences unit makes up a decent- sized portion of its overall operations. Is a bold bet to get even bigger the right move?
Source: Bloomberg

That points to the strategic logic of buying Monsanto and becoming a stronger competitor. By pooling R&D efforts, the companies could avoid duplication and benefit from each other's respective areas of expertise -- crop chemicals for Bayer and seeds for Monsanto. Bayer has already been expanding its own seed business, which has been a priority for the German company because of the parallels to its life-sciences divisions. And as Gadfly has noted, M&A is one of the few ways for chemical makers to find earnings growth these days amid slow global expansion and slumping commodity price.

Financially, however, things aren't as enticing. True, Monsanto shares have taken a hit amid the downturn in agricultural prices and are now trading near 2012 levels. Even after spiking Thursday on the news of Bayer's interest (and speculation of a competing bid from German chemical giant BASF), the company is valued at roughly 13 times its projected Ebitda this year -- a pretty significant discount to the pricey multiple ChemChina is offering Syngenta. Adding a standard 30 percent premium and factoring in assumed debt, a bid would be in the range of $60 billion. Because Bayer isn't overly burdened with debt right now, it could afford to offer some sort of cash payout to Monsanto shareholders. But any bid would need to consist primarily of stock. 

Tempting Target
Monsanto shares have tumbled as slumping crop prices forced farmers to scale back their seed and chemical budgets.
Source: Bloomberg

Bayer would still need to find considerable cost savings to justify such a move. Moreover, it is likely to encounter resistance from Monsanto. The U.S. seed maker reportedly rebuffed the idea of a Bayer takeover in March, saying it saw itself as more of an acquirer. While it's a bit hypocritical not to at least negotiate with Bayer, considering Monsanto CEO Hugh Grant has been such a big proponent of the benefits of consolidation, neither he nor Monsanto investors are likely to acquiesce easily when the stock is in the doldrums.

Bayer also will have to win over its own shareholders, who have been told its M&A strategy is more geared toward bolt-ons. Many investors have also been expecting a more health-care-focused approach after the company's $14.2 billion purchase of Merck's consumer-care business in 2014. Bayer regularly talks of expanding in animal health and it's also been speculated as a potential buyer of  $10 billion cancer drug maker Medivation. Squaring that circle may be difficult.

Bayer may be better off focusing its attention on a joint venture or some other partnership with Monsanto. That's reportedly one option that the German company is assessing internally with its advisers. It's not as sexy as a multi-billion cross-border takeover, but it could conceivably accomplish the same goals of getting bigger and stronger without as many headaches or as stretched of a balance sheet. Monsanto itself has said it now prefers partnerships and smaller technology deals to large takeovers. Sometimes there are more options than just going big or going home. 

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

To contact the authors of this story:
Brooke Sutherland in New York at bsutherland7@bloomberg.net
Chris Hughes in London at chughes89@bloomberg.net

To contact the editor responsible for this story:
Beth Williams at bewilliams@bloomberg.net