When trading stocks online or conventionally, traders must look out for acquisitions and tie-ups. These are important aspects of the corporate world, and they affect stock performance.
Bayer AG, the German pharmaceutical and chemicals multinational, had revealed that it made a $62 billion offer for acquiring US agrochemical manufacturer Monsanto Co. This deal really valued Monsanto at a significant premium. If successful, it would have resulted in the formation of the largest agrochemicals company in the world. However, Monsanto rejected Bayer’s current offer but has stated that it is willing to continue talks.
The Deal that Monsanto Rejected
Bayer confirmed that it did approach Monsanto, and said that the $122-per-share bid valued the company at 37% above its $89.03 closing share price on May 9 which was the day before Bayer’s written proposal to Monsanto for acquisition. Bayer was to carry out financing of the deal, which would have made it the largest corporate foreign takeover by a German company.
Financing was to be facilitated by combining debt and equity, with the share sale amounting to around 25% of the total value of the transaction. Bayer would have had to increase its capital by around $15.4 billion, which would have exerted strain on the company’s shares. In fact the shares have always been under pressure ever since the Monsanto talks were announced. Investors have been concerned over the high debts of Bayer and how the company would be able to pay for the Monsanto transaction without an increase in capital or divestitures.
Bayer’s Rising Debts a Concern
Bayer faced a net debt of around $20 billion (EUR17.45 billion) in 2015, which is over double the EUR7 billion debts the company accumulated in 2011. It was after 2011 that the company began a series of acquisitions, in spite of the existing debt. This trend raises further doubts for spectators. Equinet Bank analysts have calculated that by the time of the Monsanto takeover, Bayer’s net debt would exceed EUR40 billion.
According to the analysts this move could also affect the company’s flexibility in the healthcare sector, which is why Bayer’s shareholders could be uncomfortable with this takeover since they believe the company should focus more on the pharmaceutical sector and not on the agricultural field. The company’s agrochemical division returned earnings worth EUR10.37 billion out of a total EUR46.3 billion group sales in 2015.
Bayer Is All For It
Bayer had revealed that the Monsanto deal, if successful, would have enabled it to transform to an integrated life sciences company that manufactures pharmaceuticals, agrochemicals and OTC (over- the-counter) drugs. This is in line with the German company’s strategy. It also believed that a Monsanto tie-up would improve its core earnings per share in the first year by a mid-single-digit percentage and thereafter by a double-digit percentage. The tie-up would also provide $1.5 billion worth synergies after three years, Bayer believed.
However, analysts believe that Monsanto’s rejection of the deal but willingness to continue talks is an indication that it wants a better deal from Bayer, something that is at least worth $70 billion. The fear is that this could further plunge Bayer into debt or drag it more towards agrochemicals with its core pharmaceutical division suffering as a result. In Bayer’s eyes, though, a Monsanto takeover perfectly fits its plans. And it is showing signs of being willing to continue the negotiations with Monsanto.
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