German Bayer CropScience targeted by US Monsanto for takeover

German Bayer CropScience targeted by US Monsanto for takeover

Here is an analysis by ICIS, the chemical news specialist, and the author is Jonathan Lopez

“The struggling agrochemicals sector continues to consolidate, and Bayer CropScience has become a suitable target for total or partial mergers and acquisitions (M&A) overtures, although the German chemical major is unlikely to divest a recently turned around and performing business, according to analysts on March 22, 2016

Following a year of portfolio adjustment in which Bayer’s CropScience division managed to grow in high-margin performing agrochemical markets, the business unit posted sales of EUR 10.4 billion in 2015 and earnings before interest and taxes (EBIT) of EUR 2.1billion, up by 9.2 % and 16 % compared to 2014.

The agrochemical sector experienced in February what will likely not be the last bombshell this year in the industry, when Swiss agrochemicals major Syngenta was acquired by state-owned ChemChina for USD 43 billion – and left remaining market players reconsidering their options.

ChemChina’s acquisition of Swiss Syngenta, however, is still subject to regulatory approvals, and some analysts doubt the US antitrust authorities will make it an easy ride, considering Syngenta sells 25 % of its products in the US, a country which is reluctant to give to Chinese state-owned companies control of key industrial sectors.

The move, nevertheless, put an end to the 2015 saga that saw US agrochemicals major Monsanto tirelessly bidding for Syngenta to no success.

It is Monsanto that is supposedly looking at acquiring Bayer CropScience, according to some analysts, although others doubt such a move would be contemplated by the German parent company, which claims its “life sciences” project invariably links pharmaceuticals and agrochemicals together.

“Bayer CropScience is the best positioned agrochemicals firm among all the majors. They are also good at herbicides, good at fungicides and at insecticides. Few companies are good at as many things as Bayer is – they are clearly not forced to do any transaction at the moment,” said John Klein, agrochemicals analyst at Germany’s investment bank Berenberg Bank. “On top of that, strategic movements like this are never good to undertake in the middle of a management change,” he added. 

Bayer appointed on February 24, 2016, Werner Baumann as its new CEO, to replace Marijn Dekkers.

However, the failure to acquire Syngenta in 2015 may leave Monsanto in the mood to consider other large acquisition targets that could give the firm presence in markets where its operations are insignificant. Product diversification could be a factor, as the company derives a significant proportion of its sales from corn and soy in North America, lacking as significant offerings in other key, growing agrochemical markets.

However, the sales of Bayer CropScience as a whole would be an unlikely scenario as the business emerging from five years of changes and portfolio reinforcement is a very profitable one.

“The consolidation in agrochemicals has put players under pressure. But while consolidation took place, Bayer CropScience has been transformed during the last two years – with new product launches which have given it higher margins as well as facing less generic competition. Together with a better regional divide, they have made the business less cyclical,” said Ulrich Huwald, an analyst covering Bayer at Hamburg, Germany-based Warburg Research. 

“Although talks are taking place and Bayer is listening to Monsanto, I could only see smaller parts of CropScience being divested, but not the whole of the business in any case. Something Monsanto could look at is Bayer’s cotton business.”

The agrochemicals consolidation puzzle remains one where farmers in key markets are seeing falling prices and reduced margins, which puts pressure on the majors of the sector by squeezing their profits. On the other hand, high research and development (R&D) costs continue to be a constant, further increasing the need for synergies among agrochemical players.

A spokesperson Bayer said the company has worked hard to become a “life sciences”, a company focusing in both human health and agricultural markets, adding it would not give up that wealth easily.

“Anybody could consider anything, but the reality is Bayer is very much focused in making all the attributes a life sciences companies can get – why would you undermine that by speculating about other options? From a Bayer perspective we are focused on making this life sciences firm work,” said the spokesperson. 

Where would the other German chemical major stand in the latest agrochemicals push for consolidation? At the end of the day, BASF, the firm has also an agrochemicals division and, following the downturn in key divisions like petrochemicals and oil and gas, some analysts have pointed to a “transformational deal” for the company to continue being able to have investors’ confidence – and shareholders content by distributing generous dividend.

However, Berenberg’s Klein plays down that urgency for BASF to get into a large deal for the moment, although he mentioned the recurring market talk about the German firm having secured a USD 50billion bridge loan for a large transaction. Supposedly, these USD 50 billion would have been ready in 2015 to acquire Syngenta but the transaction never came to be realised in the end.

“Somehow BASF would feel that if other players are moving in the agrochemicals M&A Mergers and Acquisitions space, their duty would be to line up financing in case they do something. Could they afford it [a large transaction]? They could but it would be imply a massive rights issue which would be hard to sell to shareholders,” concluded Klein and his colleague at Berenberg covering BASF, Evgenia Molotova.”

Leave a Reply

Your email address will not be published. Required fields are marked *

This site uses Akismet to reduce spam. Learn how your comment data is processed.