Looking back at the biggest deal of 2016: Bayer-Monsanto
The industry followed Bayer’s attempts to acquire US agricultural firm Monsanto with fevered anticipation; the takeover eventually closed in September for $66 billion, debt included. Winckworth Sherwood’s Catherine Moss delves into the implications of the biggest deal of 2016.
The flesh of the deal
The overall aim and ambition of this transaction is to create “a Global Leader in Agriculture”, says Bayer CEO, Werner Baumann, an “innovation engine to deliver enhanced solutions for the next generation of farming”. Within this vision lies the Holy Grail for agricultural companies - the capability to offer an integrated agricultural offering. Bayer and Monsanto are also betting that with pricing in the agricultural sector having been in a state of low growth for a number of years, that the cycle is about to change and this will work to the combined entity’s benefit.
The impact on both companies’ pharmaceutical, animal health and consumer health businesses will be to create a business with annual sales of over €23 billion but significantly less has been said publicly by either party about what the strategic focus for this merged business will be.
National governments, however, are facing consumer and regulatory pressure against the creation of trading behemoths capable of influencing a substantial swathe of pricing across multiple key sectors. Will this deal survive that pressure?
The bones of the deal - how it was structured
The result of the merger will be a US$66 billion agrochemical (and pharmaceutical) company, inclusive of US$9 billion of additional debt. US$1.5 billion of cost savings are expected to be achieved after the third full year of trading as a combined entity following the date of the deal’s expected close, or completion, in December 2017.
Bayer will pay for Monsanto in cash with a US$57 billion bridging loan and a promise to sell at least $US19 billion in convertible securities and through rights issues to its shareholders.
If the deal fails to get regulatory approval, Bayer will have to pay to Monsanto a break-up fee of US$2 billion.
What perils lie in its way?
There is a complex set of consents needed to take the deal to completion including those from at least 30 separate anti-trust authorities globally, such as those in the US, EU, Brazil and Canada.
The broad areas of concern have already been flagged by various competition and anti-trust regulators, including European Union Competition Commissioner, Margrethe Vestager, who said on the deal’s announcement that farmers must continue to have a choice when buying seeds and pesticides after the merger between Bayer and Monsanto and that the agriculture market was already very concentrated with a small number of global players dominating the industry.
The combination in one company of seeds and herbicides has been flagged by Maurice Stucke and Allen Grunes, counsel at The Konkurrenz Group, as likely to:
- Eliminate direct competition between two of the largest players in the farm supply and seed sector, with direct consequences for seed development, herbicide markets, and innovative research and development;
- Lead to higher input prices, with less choice and higher food prices for consumers;
- Reduce non-biotechnology options available to farmers and consumers;
- Increase Monsanto’s already significant market power and dominance in herbicides and genetic traits for seed, creating a super-platform of seed traits and their complementary herbicides. This potentially creates an unacceptable market concentration for wide swaths of commercial seed development and sales, including the majority of cottonseed, canola, soybeans, and corn developed in North America; and
- Increase restrictions on independent research of seed traits and herbicides.
Other large deals with market impacts within the same or related sectors, currently also under consideration by national and international competition and anti-trust authorities, may have a material impact on each other and create a febrile atmosphere within which to attempt to close another:
- DuPont and Dow Chemical – announced December 2015 – US$130 billion deal concentrating their interests in agriculture, material science and speciality products. Although each of these three businesses is subsequently to be spun out into three independently publicly-traded companies, that element of the deal has already been dismissed as “insufficient” by Vestager. She noted that “the livelihood of farmers depends on access to seeds and crop protection at competitive prices….We need to make sure that the proposed merger does not lead to higher prices or less innovation in these products”.
- Chemchina and Syngenta – announced February 2016 – US$43 billion deal, the largest-ever overseas acquisition by a Chinese entity of a Swiss agribusiness. With sales in North America amounting to more than 25% of Syngenta’s global total, this initially raised national security concerns in the US over the security of US food supply but then was cleared by the US Committee on Foreign Investment in August 2016. This deal is however still subject to competition clearance in the US and the EU.
In a market where there has been pricing pressure on agrochemicals groups, the results of all three recent deals could, if all are completed, “place more than 80% of U.S. corn-seed sales and 70% of the global pesticide market under just three companies, sparking fresh concerns about the pricing power of the sector’s largest players as low crop prices are squeezing farmers’ incomes”. Anne Steele, Wall Street Journal, 14 September 2016.
Initially, Bayer will shift its focus towards its crop-science division with fears that its combined pharmaceutical division will receive significantly less attention from management. Although Bayer CEO, Werner Baumann, has recently emphasised that the deal will reinforce Bayer’s “leadership position as a life science company”, it remains to be seen whether that status can be retained within a newly combined group overtly focused, and potentially distracted, by its need to be a global leader in agriculture.
The newly merged business will create a group whose sales are split almost equally between pharmaceutical life sciences and agricultural sciences. If the respective P/E ratios for each of the pharmaceutical and seed and pesticide sectors start to diverge significantly, a case will be made that it would make more sense (for shareholders and potential investors) to spin-out the pharmaceutical segment into a separately listed company.
More immediately from a competition perspective, either of Bayer or Monsanto may be forced by competition regulators to divest themselves of products where they have, collectively, a dominant position. Put Liberty Link, Bayer’s best-selling herbicide with Monsanto’s Roundup and glyphosate resistant seeds, Roundup Ready, together the two leading herbicides/weed-resistant technologies in the world, you create a dominant position in the herbicidal/weed-resistant segment.
The concentration of seeds and traits has caused concerns too. On its own, Monsanto’s already has significant market share in a number of seeds and traits. Taking only cotton seeds, the combined Bayer-Monsanto would cover 70% of US crop acreage. Canola and soy trigger similar concerns in the US and other geographies too.
Possible risks to health of the relationship?
National governments are loath to allow the creation of trading behemoths capable of influencing a substantial swathe of pricing across multiple key sectors where governmental, consumer, and business, watchfulness is prevalent. The Bayer-Monsanto merger has been designed to create a one-stop shop for seeds, crop sprays and advice to farmers worldwide.
Farmers, and consumer groups, are, however, worried that such a strong entity could theoretically ascribe premium prices to its products because of the implicit promise of greater effectiveness and a higher yield. Competitiveness, they say, will be reduced.
In addition, the barriers to entry for competing products are made much higher. Monsanto’s CEO has described the deal as a match made in heaven “When you bring these two platforms together you unlock new products and you unlock innovation on a totally different scale”.
Deals like the Bayer-Monsanto merger have been flagged by lawmakers in the US as having “an enhanced adverse impact on competition in the industry and raise barriers to entry for smaller companies by altering the industry structure for seeds and chemicals”. US Senate judiciary committee chairman Charles Grassley.
Potentially in a market dominated by behemoths, all a start-up or fledgling business can hope for is to be acquired by one of them. This state of affairs will resonate with anyone who has been involved in fundraising for early stage pharmaceutical companies where it sometimes feels as though all you are doing is creating a pipeline for bigger companies to pick-over.
Competitors too have raised concerns that global dependency on a limited number of suppliers could create financial, but also biological, dangers.
Potential flash points for pharma world and how these may impact the stability and consummation of the deal
As this is being written, it is unclear who the occupant of the White House will be on January 20th 2017, or, indeed what their policies will entail for pharmaceutical and agricultural life science, companies.
Clinton’s campaign has highlighted concerns over price increases and she has said that she will put a plan into effect to lower prescription drug costs. Trump too wants to reduce prices but seems to have decided that this will occur by opening up the US to products made in other jurisdictions. Potentially, this could damage the profitability of the Bayer-Monsanto pharmaceutical business but probably not, initially, in a manner which would put the merger at risk.
Neither candidate’s policies on agriculture and the role of agrichemical companies have been fully explained. Clinton has a plan for a “Vibrant Rural America” but it is not clear where that would place her administration on the Bayer-Monsanto deal. Trump seems to have a less interventionist approach to large companies.
Taking a stance which can be portrayed as protecting consumers, and farmers, might prove attractive to either candidate’s administration. It would be a relatively easy populist move to take by reviewing the wave of consolidation the Bayer-Monsanto, Dow-DuPont and ChemChina-Syngenta transactions represent.
In deal-making time, December 2017 is a long way away and much could change.