Bayer, Monsanto Face Global Review as Farmer Options Shrinkby
Proposed takeover of Monsanto adds to sector’s deal frenzy
Companies seek global regulatory approval in 30 jurisdictions
Antitrust officials around the world who are already grappling with a wave of consolidation across agriculture will be forced to sort through a new layer of complexity now that Bayer AG has clinched a deal to buy Monsanto Co. to create a seed and crop-chemical giant.
In a sign of just how protracted the review will be, the companies said they will seek approval in 30 jurisdictions around the world, including the U.S., European Union, Canada and Brazil, and don’t expect to close until the end of 2017.
EU Competition Commissioner Margrethe Vestager said the goal is to ensure farmers “enjoy affordable prices, choice and not to be locked in with just one provider.”
The $66 billion tie-up -- the biggest deal this year -- follows months of mergers that are consolidating agriculture’s top seed and chemical producers into a knot of global powerhouses. While the companies say the overlaps between their businesses are minimal, their tie-up creates a large combined footprint in cottonseeds and crop-chemicals, and may raise concerns that competition in research and development could suffer, reducing innovation, analysts say.
Antitrust officials will consider not just each deal individually, but how all the deals combined would impact markets, said Elai Katz, an antitrust attorney at Cahill Gordon & Reindel LLP in New York.
"Whenever we think about merger review it’s always about the future. You’re imagining what will the world look like after this merger," Katz said. "Here you have to say what will the world look like after this merger, and this merger and that merger. That by definition complicates it."
The biggest producers of seeds and chemicals have already transformed crop-production worldwide, with a new round of consolidation promising to further shape the global food supply. Biotech crops, the result of decades of development and billions of dollars in investment, have increased farm productivity and in many cases led to lower prices for consumers. At the same time, critics say, crop diversity has declined and small-scale farms are disadvantaged.
The proposed combination of Bayer and Monsanto would create a seed and crop-chemical heavyweight with about $26 billion in sales. The deal would give Germany’s Bayer, whose businesses include chemicals and pharmaceuticals, a company that’s both the world’s largest seed supplier and a pioneer of crop biotechnology. The kind of genetically modified seeds that Monsanto started to commercialize two decades ago now account for the majority of corn and soybeans grown in the U.S.
Cottonseed, canola seed and glufosinate herbicide assets, with sales totaling about $1.2 billion, may need to be divested, analysts at Sanford C. Bernstein & Co. said in a note.
"We expect significant antitrust and political hurdles and assign 50 percent probability of deal completion," the Bernstein analysts led by Jeremy Redenius said.
Investors appear to be fretting about the deal’s prospects for approval. Monsanto shares closed Wednesday at $106.76, well below Bayer’s offer to pay $128 a share.
Seeds and crop chemicals are major expenses for farmers, which could trigger political backlash against the deal. The Senate Judiciary Committee is planning to hold a hearing on mergers in the industry on Sept. 20, and several lawmakers warned about risks to competition.
“Iowa farmers who I’ve spoken with are worried about rising input costs, especially in an increasingly weak agriculture economy," said Senator Chuck Grassley, an Iowa Republican. "Today’s announcement will only heighten those concerns."
Senator Mike Lee, a Utah Republican who leads the Judiciary Committee’s antitrust panel, said the deal raises "serious antitrust issues" and could reduce consumer choice, while Vermont Senator Bernie Sanders called it a "threat to all Americans."
“Any time you have this level of change, growers will be leery and concerned about what it’s going to look like tomorrow when it all shakes out,” said Kolby Nichol, vice president of business development for Winnipeg, Manitoba-based Farmers Edge Inc., a precision agriculture data company.
In the U.S., the Justice Department, which shares antitrust enforcement with the Federal Trade Commission, will probably review the combination since it scrutinized other Monsanto deals. The companies also said they plan to file with the Committee on Foreign Investment in the U.S., which reviews foreign acquisitions of U.S. businesses.
The Bayer-Monsanto agreement follows pending deals between Dow Chemical Co. and DuPont Co., and China National Chemical Corp.’s planned takeover of Syngenta. The rush to consolidate doesn’t just affect seeds and chemicals: Fertilizer makers Potash Corp. of Saskatchewan Inc. and Agrium Inc. have agreed to merge, while Deere & Co. is fighting to complete a deal with Monsanto that the U.S. Justice Department says would give the manufacturer a virtual monopoly for high-speed planters used on farms.
"Economists have been raising questions about competition economy-wide -- whether there have been too many mergers and acquisitions, whether companies are getting too big, whether they’re not being competitive enough. We see these same sort of trends happening in agriculture," said Keith Fuglie, an economist at the U.S. Department of Agriculture.
Mergers among agriculture firms over the last two decades have helped the biggest players sharply consolidate their control over markets, according to the Agriculture Department. In crop seeds and biotechnology, for example, the four biggest companies had a market share of 54 percent in 2009, the most recent data available, up more than double from 21 percent in 1994.
The takeover would give the combined company 58 percent of U.S. cottonseed sales, according to the most recent U.S. government data, which means it’s probably an area they’ll have to address by offering to sell assets.
Monsanto became the largest U.S. cottonseed company in 2007 with its purchase of Delta & Pine Land Co. for $1.6 billion. To satisfy antitrust concerns, St. Louis-based Monsanto agreed at the time to sell its Stoneville Pedigree Seed unit, which had 12 percent of U.S. cottonseed sales, to Bayer for $310 million. It also agreed to divest its smaller NexGen cottonseed brand.
Another focus of the antitrust review will be on the companies’ competing biotechnology that produces herbicide-resistant seeds, according to Jason Miner, an analyst at Bloomberg Intelligence. The companies also compete in selling herbicides, though Monsanto’s herbicide -- Roundup -- is a commodity product with lots of generic competition from other suppliers, while Bayer produces more advanced weed-killer, he said.
In crop chemicals like herbicides, the companies created by the Syngenta-ChemChina and Bayer-Monsanto mergers would control more than half the market, according to 2015 data compiled by Bloomberg. For corn seeds, a combined Dow and DuPont along with Monsanto would control nearly three quarters of the U.S. market, while in soybeans, they would hold about 65 percent, according to 2015 data from Verdant Partners, an agriculture consulting firm based in Champaign, Illinois.
A more important issue for competition authorities may be the effect of the deals on R&D, particularly in advancing the biotechnology that has revolutionized farming by producing traits in seeds. Monsanto, Bayer, Dow, DuPont and Syngenta dominate this market, said Dean Cavey, a managing partner at Verdant, which has done work for the companies doing deals.
The looming consolidation risks undermining competition between companies to innovate and introduce new products, according to of the American Antitrust Institute, a Washington-based organization that is critical of further concentration in the industry. Fewer competitors also mean reduced opportunities for the firms to collaborate in developing seed traits, said AAI president Diana Moss.
"You want them maintaining independent R&D programs so they can compete hard to be first to market, and the mergers would eliminate that," she said.
Cavey at Verdant disagrees. While the proposed mergers would reduce the number of leading R&D spenders, he said, combining would give the companies the resources to increase spending on the innovations that benefit farmers.
"The only way innovation is going to take place is by spending lots of money, and that has to be by these companies," he said. "They’re the only ones that can afford it."