Bayer's Higher Monsanto Bid Eases Antitrust, Financing Worries
Bayer's (BAYRY) - Get Report $3-per-share increase to its bid for Monsanto (MON) is probably the least important thing about its new offer, though the diminutive improvement may come as a considerable relief to the bidder's own shareholders.
The key developments announced on Thursday are in the appendices of the new $12- per-share, or $63.5 billion offer, notably the inclusion of a $1.5 billion breakup fee and the declaration that debt funding for the entire offer is in place.
The revised bid follows several weeks of private conversations in which Monsanto's management made clear its concerns that the deal would not clear an antitrust review and that Bayer could struggle to raise the necessary cash given opposition among the bidder's shareholders to an equity increase.
The amendments are probably enough to give Monsanto, the world's biggest seed maker, a reason to open its books to Bayer in the hope of securing a further improvement to the bid. Monsanto said only on Thursday that it would "review the proposal."
The $1.5 billion reverse antirust break fee, which is payable by Bayer in the event that the deal is blocked, gives the German company serious incentive to clear the hurdles that regulators place in the way of the deal. A combination will attract attention from the Department of Justice in the U.S., the European Commission as well as a host of other national regulators from around the world, many of which will be reluctant to see less competition in the market for agricultural inputs.
Monsanto shares closed Thursday at $104.22, up 3% on the day but still 17% below Bayer's bid price, a clear sign that investors have their doubts the takeover will proceed.
The revelation that Bayer has lined up five banks to provide debt to finance the entire transaction is also a game changer. The initial offer for Monsanto, announced by the target on May 19, was to be 25% financed with a share sale, likely to be worth about $16 billion. Bank of America Merrill Lynch, Credit Suisse, Goldman Sachs, HSBC and JPMorgan will now provide debt equal to the entire amount.
Bayer's revised offer doesn't mention a capital increase, though neither does it rule out a share sale, either as part of the bid or later to repay some debt after the purchase closes. Bayer is currently carrying about €24 billion ($26.7 billion) of net debt including pension liabilities, equal to 2.2 times Ebitda. A 100% debt-financed acquisition of Monsanto would send that figure to €77 billion in 2017, including $8.3 billion of net debt at Monsanto, or 5 times Ebitda, according to Exane BNP.
Bayer has said it doesn't need to make any disposals to fund the deal. But higher levels of debt, coupled with shareholder reluctance to be diluted through a capital increase, could still force its hand, according to analysts. The lowest hanging fruit is the German company's 64% stake in recent spinoff Covestro AG, a maker of polymers that Bayer has said it will sell down over time.
"Bayer could reduce its net debt position through the planned exit from its Covestro stake which could raise [about] €5 billlion and release €3 billion of net debt/pensions from Bayer's balance sheet," wrote Exane analyst Luisa Hector on Friday.
Covestro shares have climbed 20% in the past three months, pricing in expected earnings growth of about 3% this year, making the prospect of a sale even more tempting.
It still won't be easy to convince Bayer's already reluctant shareholders that offloading a fast-growing chemicals business to buy a sluggish seeds operation makes sense. Monsanto's second-quarter net income fell to $1.06 billion, down $370 million on a year earlier, as it missed analyst expectations for the second quarter running.
That is also likely to limit any further increase in Bayer's offer, should it now be granted access to Monsanto's books.
Exane estimates that Bayer's return on investment from a Monsanto acquisition would be about 7.1% by 2020. That is below the bidder's current cost of capital of 7.7%. In other words, the acquisition will be loss making for at least three years unless Monsanto rapidly turns a corner.
That doesn't leave much wiggle room for a significant hike to Bayer's current offer.
Bayer shares traded Friday morning in Europe at €93.33, marginally lower than their Thursday close.