Bayer has given its shareholders some welcome relief.
The German pharmaceutical company raised its takeover proposal for U.S. seed giant Monsanto as expected -- but by a mere 2.5 percent. That compares with the 5 percent rise in the S&P 500 since Bayer's interest first emerged. It's symbolic of a willingness to pay more, plus a commitment to protecting its own shareholders. Combined with a $1.5 billion break fee and commitments on financing, it gives Monsanto some justification to grant due diligence.
Doubtless, Monsanto shareholders still don't think the new $125-per-share proposal is sweetened enough. But the reality is that Bayer cannot justify making a higher proposal without further help from Monsanto. Bayer's first $122-per-share pitch was already richly priced, paying away all the financial benefits of the deal in a 37 percent premium, with returns in excess of the cost of capital at least three years away. The bidder's shareholders took fright not just at the price, but also at the strategic drift and potential opportunity cost of doing a mammoth deal that would preclude alternative transactions in pharmaceuticals.
It is extremely unlikely that the latest bump gets Bayer to the finish line. But it would be reckless to offer a higher price given the difficulty in making the math stack up, especially after the weak quarterly results Monsanto recently reported. Maybe Monsanto can demonstrate more value in due diligence. For now, Bayer shareholders should be thankful for the German group's discipline.
Monsanto has said it has alternatives. It is contemplating a purchase of BASF's agrochemicals business, a deal which has the potential to create substantial value. Still, its shareholders won't be grateful if it turns to being a buyer without having fully explored what it can get from selling to Bayer. Some analysts think that an offer of $135 to $140 a share is what is required. For Bayer to pay that would require raising even more equity from its shareholders than previously envisaged, given the extreme leverage it would be taking on even with its first proposal.
Bayer has signaled both price discipline and a readiness to pay more. Monsanto has said it believes in a deal. That is an opportunity for the U.S. seeds group to explore what Bayer really can pay.
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