German chemicals giant BASF AG restrained its ambition as its global chemicals peers did one mega-deal after another.
While Dow Chemical Company and DuPont agreed to merge, China National Chemical Corp. agreed to buy Syngenta AG and domestic rival Bayer AG snared Monsanto Company, BASF avoided big-ticket acquisitions. Now it has agreed a highish price for a business thrown onto the market as a result of the consolidation spree.
BASF is to pay Bayer 5.9 billion euros ($7 billion) for seeds assets that would overlap with those being bought from Monsanto. The fusion of chemicals and agriculture has been a driving theme in M&A. Bayer has gone all in, offering $66 billion in cash for Monsanto. BASF will still be a smaller fourth player in this market, but with viable scale and scope.
At first glance, it looks like BASF is paying for holding back. The price is high at 15 times trailing Ebitda. That's still less than what Bayer is handing over for Monsanto on a comparable basis, but the average multiple for agricultural chemicals deals in the last three years is 10.6, according to Bloomberg data.
Still, it's not obvious BASF has overpaid. Deal benefits should bring the multiple down a few notches. BASF reckons the purchase can cover its 7.5 to 8 percent cost of capital and investors should expect it to prove it within three years. While this is BASF's biggest acquisition, net debt should remain comfortably below 2 times Ebitda.
Bayer was effectively a forced seller for the sake of smoothing the path of the Monsanto deal through antitrust clearance. BASF hasn't really been able to exploit that, with the impression that it was equally a forced buyer of Bayer's castoffs. It didn't have much alternative if it wanted to build a meaningful position in the sector.
Nevertheless, these are good businesses. The nature of antitrust approvals means Bayer can't cherry pick what stays and what goes.
Bayer's share price ticked up on the deal and BASF's fell a bit, implying the market sees a slight value transfer to the seller. That looks about right. BASF has trodden carefully, but hasn't avoided being the price-taker rather than the price-maker here.
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