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Bayer closed its $62.5-billion acquisition of Monsanto on 7 June, creating a runaway leader in the worldwide agricultural chemicals and seeds industry. The closing of the deal came just one week ahead of the 14 June deadline agreed by the two companies, after which Monsanto would have been entitled to ask for a renegotiation.

To secure key European and US antitrust approvals, Bayer will divest businesses with combined 2017 sales of €2.2 billion ($2.6 billion) and pro forma 2016 EBITDA of €550 million to BASF for a base purchase price of €7.6 billion. These comprise two packages. The first—glufosinate herbicide and glufosinate-resistant and certain field crop seeds—was agreed in October 2017 and was more or less expected by Bayer. However, the second, smaller element worth €1.7 billion, which was ordered by the European Union—seed treatments, vegetable seeds, ‘industrial-use’ glyfosate in Europe, hybrid wheat technology, and a digital farming platform—came as a surprise.

The US approval requires Bayer and Monsanto to wait until the divestitures are complete before starting to integrate their operations. Bayer expects this to take about two months. After the merger is finalized, Bayer will drop the Monsanto name for its business, although the acquired Monsanto products will retain their brand names.

A minor hitch was an eleventh-hour bid by the seeds company KWS (Einbeck, Germany) for Bayer’s vegetable seeds business, Nunhems, for what KWS says was a higher price than what BASF agreed to pay and in line with the price—about 17x EBITDA—that Bayer is paying for Monsanto. BASF will pay about 13.8x 2016 pro forma adjusted EBITDA for the businesses it is acquiring from Bayer. KWS says its nonbinding offer was first made to Bayer on 26 January, more than two months before Bayer agreed to sell to BASF, but was not disclosed at the time. KWS went public with its “highly attractive offer” at the last minute in an attempt to get Bayer to change its plans.

But analysts say that Bayer was too far down the track with BASF to risk upsetting the timetable for the entire Monsanto acquisition, especially given the imminent 14 June deadline. On the evening of the day that KWS went public with its offer, 29 May, BASF was deemed by the EU Commission a suitable buyer of all the businesses that Bayer was required to divest and KWS admitted defeat.

In Monsanto, Bayer is acquiring “new and very attractive businesses that will take us forward to become a leading agriculture company,” Bayer CEO Werner Baumann said. He considers the acquisition to be as attractive today as it was when first announced two years ago. “…I’m convinced that this acquisition has very great potential for creating value for our company, our stockholders, and our customers,” he said. “Market growth this year is expected to pick up again for the first time in three years, Monsanto has already shown its resilience with recent strong performance. That makes it a great time to close the acquisition,” Baumann said.

Bayer expects a positive contribution to core earnings per share in 2019, with a double-digit-percentage increase from 2021. It expects annual synergies of $1.2 billion to underlying EBITDA from 2022.

Including Monsanto and adjusted for the divestments, Bayer’s health and agriculture businesses would have been roughly equal in size in 2017, with total pro forma sales of €45.1 billion, including €19.7 billion from the combined crop-science business.

Bayer says it will be a major contributor to the worldwide agricultural industry by offering seeds and plant traits; chemical and biological crop protection; and digital technologies, information, and consulting.

To help finance the acquisition and repay the bridging loan—originally $57 billion—from a group of banks, Bayer has launched a 2-for-23 rights issue to shareholders to raise €6.04 billion. Proceeds from the divestment of the materials science business Covestro; the investment by Temasek, a Singaporean sovereign wealth fund, in new Bayer shares; and new debt issuance will also contribute. In the rights issue, open from 6 June to 15 June, the company will offer existing shareholders 74.6 million new shares at a subscription price of €81 per share, a 22% discount to the closing price on Friday 1 June. Any unsubscribed shares will be placed with institutional investors for at least €81 per share.

Bayer says the rights issue is smaller than originally planned because the proceeds from the sale of Covestro shares exceeded expectations and because Temasek subscribed for €3 billion of new Bayer shares, increasing its stake from 0.4% to 4%, in April. Bayer has also announced plans to raise additional debt via the issue of €20 billion of dollar- and euro-denominated bonds.

Baumann said that Bayer’s placement of Covestro shares early in May concluded the Covestro selling process. Bayer now holds just 6.8% of Covestro’s shares to repay an exchangeable bond that matures in 2020. The latest sale generated more than €9 billion, while the exchangeable bond, issued last year, raised an additional €1 billion. Overall, including the debt transferred via Covestro’s stock market listing, Bayer generated more than €15 billion from the Covestro separation, about €4.5 billion more than expected.

By Natasha Alperowicz

Source: Chemical Week