German drugs and chemicals group Bayer has made an unsolicited take-over proposal to US seeds company Monsanto, aiming to create the world's biggest agricultural supplier and take advantage of converging pesticides and seeds markets. Monsanto disclosed the approach on Wednesday before Bayer confirmed its move, though neither released proposed terms. The $42 billion market capitalisation of Monsanto means that the deal would be likely to eclipse ChemChina's planned acquisition of Swiss agrichemicals company Syngenta - a target Monsanto itself pursued last year - and could face US antitrust hurdles.
A Monsanto statement said that its board was reviewing the proposal, which is subject to due diligence, regulatory approvals and other conditions. There is no assurance that any transaction will take place, it added. Bayer shares dropped more than 8 percent to a 2-1/2 year low of 88.39 euros in early Thursday trading, with some investors worried by the potential cost of a deal.
Monsanto shares were seen 7.6 percent higher at $104.50 in pre-market trades. UBS Global Asset Management, which Reuters data shows is among Bayer's 30 biggest investors, said it was "deeply concerned" about the burden on Bayer's finances from a take-over, saying it would prefer the companies to agree a joint venture or a nil-premium merger. Deutsche Bank analysts said a deal could shift Bayer's centre of gravity to agriculture, accounting for about 55 percent of core earnings, up from roughly 28 percent last year excluding the Covestro chemicals business Bayer plans to sell.
That would have a negative impact on sentiment among Bayer's healthcare-focused investor base, the bank said. Bayer, which has a market value of $90 billion, said the merger would create "a leading integrated agriculture business", referring to Bayer's push to seek more synergies from combining the development and sale of seeds and crop protection chemicals.
Most of the major agrichemical companies are aiming to genetically engineer more robust plants and custom-build chemicals to go with them, selling them together to farmers who are struggling to contend with low commodity prices. While no take-over price was mentioned by either company, Bernstein Research analyst Jeremy Redenius estimated that it would be 41.9 billion euros ($47 billion), plus 6.7 billion euros in assumed debt. He said that Bayer might need a 27 billion euro share issue to help to fund the purchase. Citi analysts have said that Bayer would probably need to pay 14-16 times Monsanto's core earnings, implying a take-over price including debt of 57 billion euros to 65 billion euros.
A sale of Bayer's stake in foam chemicals maker Covestro could raise about 4 billion euros, while its animal health business, which Bayer has said it might put on the block, could fetch up to 7 billion euros. The proposal comes as ChemChina's deal for Syngenta faces regulatory review in the United States over concerns about the security of US food supply. Any deal between Bayer and Monsanto, which would be Bayer's largest by far and dwarf the 17 billion euro take-over of drugmaker Schering in 2006, could raise US antitrust concerns because of an overlap in seeds business, particularly in soybeans, cotton and canola, antitrust experts have said. The proposal comes less than three weeks after Werner Baumann took over as Bayer chief executive, a sign of the power base he built in his previous role as strategy chief.
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