The deal would create a global juggernaut providing farmers with everything from seeds to crop chemicals.
Bayer said it was offering to buy Monsanto for $122 per share, a 37 per cent premium to its undisturbed share price of $89.03 on May 9. The bid values the company at $62bn including net debt of about $9bn, and would overtake the purchase of InBev by Anheuser-Busch in 2008 as the largest cash deal in history if completed, according to Dealogic.
Alarm bells are ringing over the German group’s bid for Monsanto
Monsanto said last week it had received an unsolicited offer from Bayer but it did not disclose the terms of the proposal. Bayer, which confirmed the approach, also declined to give further details.
Shares in Bayer had fallen more than 10 per cent since news of its interest first emerged last week, amid shareholder concerns about the potential cost of a deal.
Johannes Dietsch, Bayer’s chief financial officer, acknowledged on Monday that the deal would require a capital increase of about €14bn, and would raise the company’s debt level “substantially”.
Shares in Monsanto surged more than 7 per cent in pre-market trading in New York. The company declined to comment.
If successful, the acquisition would make Bayer, under new chief executive Werner Baumann, the world’s biggest agriculture supplier, and add Monsanto’s genetically modified seeds to its stable of crop sprays.
The agribusiness sector is on the verge of huge consolidation following deals between Dow Chemical and Dupont along with Syngenta and ChemChina. A tie-up between Bayer and Monsanto would leave Germany’s BASF as the only outlier going solo among the main competitors in the industry.
Hugh Grant, Monsanto’s chairman and chief executive, has backed combining the capabilities of the leading seed and chemicals companies in recent years.
However, he has failed on three separate occasions since 2011 to convince its most compatible rival, Switzerland’s Syngenta, to agree a deal. The latest failure, which came last year, pushed Syngenta into the hands of ChemChina, a Chinese conglomerate.
The scale of consolidation is likely to invite scrutiny from antitrust regulators in Washington, Brussels and elsewhere. Analysts say there is not significant revenue overlap between Bayer and Monsanto but a combination could give it greater control over farmers’ supply chains.
Analysts at Olivetree Securities said Monsanto would likely seek a higher offer from Bayer, and that the potential for a response from rival BASF would probably push the US company’s share price up on Monday.
“The releases we are seeing appear to be as much about Bayer selling the merits of the proposal to its own shareholders as about bear-hugging the target”, they said.
Bayer said a combination with Monsanto would increase its core earnings per share by a mid-single-digit percentage in the first full year after closing, and a double-digit percentage thereafter.
It said it expected annual synergies of about $1.5bn after year three, plus additional benefits in future years. Bayer’s sales would be boosted by €12.7bn a year and its earnings before interest, tax, depreciation and amortisation by €4bn, said Mr Baumann.
The German company said it was confident of its ability to finance the transaction through a combination of debt and equity, with the expected equity portion making up about 25 per cent of the transaction’s enterprise value. This, it said, would be raised mainly through a rights offering.
Bayer already has a relatively high debt compared with peers, stemming from its acquisition of Merck & Co’s consumer health business in 2014 for $14.2bn. At the end of last year, its debt to ebitda ratio was about three times.
Mr Dietsch said this would rise to four times as a result of the transaction, and the company could “temporarily” accept a lower credit rating. But then it would act aggressively to deleverage its balance sheet and reduce debt, helped by the strong cash flows from the combined businesses.