Bayer AG (ADR) (OTCMKTS:BAYRY) rose 3% in early Wednesday trade after its $66 billion, $128-per-share bid for Monsanto Company (NYSE:MON) was accepted. Top executives appeared on TV to say they expect regulators to approve it, and Bayer stock was lifted in response.
Monsanto stock barely reacted to the deal on Wednesday morning, still hovering near the pre-bid price of $107, a value of $46.2 billion.
That is doubtless due to the regulatory juggernaut that Bayer’s deal still has to go through, with both European and American agencies showing increased skepticism toward big deals of any sort.
The deal would consolidate a global farming chemical-and-seed business at a time of global glut in farm commodities. I drove through the Midwest several times in the last month, and the corn really was as high as an elephant’s eye, the soybeans super-abundant in the fields. This is thanks in large part to genetically-modified seed and fertilizers made by Monsanto.
But if it goes through, expect good things from Bayer and BAYRY stock.
The Terms of the Deal
The terms of the deal, announced in a press release, include $19 billion in new Bayer stock, in the form of mandatory convertible shares with subscription rights, and $47 billion in cash, to be financed through a $57 billion bridge loan which has already been obtained.
If the deal falls through, Monsanto gets a $2 billion break-up fee.
The price is 44% more than Monsanto was worth in May, and 19% above the $106 per share it was worth before the deal was announced. Assuming the deal does go through, the shareholders are going to do very well.
The question becomes whether there can be big farming profits in a world of GMO, and whether BAYRY can capture them at the hefty price it is paying.
The answer, of course, is yes.
Making It Work
What is working with grains can work with other agricultural commodities. Genetic engineering is really just an acceleration in the cross-breeding technology we have been using for centuries, techniques we’ve been using on cats and dogs for millennia. Ironically, Bayer becomes the largest player in GMOs at a time when the German government is among the most skeptical in the world about them.
Before this deal, Bayer was basically a medical company. The soccer team it launched in 1904 still has a Bayer aspirin tablet on its club shield. Its drugs include Cipro, Levitra, Xarelto and the Yaz line of birth control products. It’s more heavily involved in consumer products, like Aleve, Claritin, One-a-Day, and in and animal health products like Advantix.
Regulators may protest that Monsanto makes GMOs a two-way race between Bayer, a German company, and Syngenta AG (ADR) (NYSE:SYT), whose sale to ChemChina is now being finalized. Monsanto would give Bayer a market cap north of $130 billion — hefty, but still well short of pharmaceutical giants like Merck & Co., Inc. (NYSE:MRK), Pfizer Inc. (NYSE:PFE) and Johnson & Johnson Inc. (NYSE:JNJ).
That’s part of the hope here — that Monsanto’s roughly $15 billion in annual sales, and $3.5 billion in net income, can deliver to Bayer the financial kick it needs to play in those big leagues of drug discovery. This deal would more than double Bayer’s sales, and triple its net income.
However, it may take up to two years to close, and would meanwhile occupy all of management’s time.
More Deals On The Way
Given the price, and what this does to the Bayer balance sheet, it seems inevitable that more deals are going to follow this one.
The whole crop unit could become a new company, the consumer health units might be sold, or the pharmaceutical units could go on the market.
Either way, it’s going to be interesting times for Bayer shareholders. My personal view is it’s going to be a profitable time, that the combined company, and its pieces, are going to be worth a lot more in two years than they are now.
Dana Blankenhorn is a financial journalist who dabbles in fiction, his latest being The Reluctant Detective Travels in Time. Write him at email@example.com or follow him on Twitter at @danablankenhorn. As of this writing, he did not hold a position in any of the aforementioned securities.
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