A market for three?

Shortly after Syngenta’s Michel Demare rebuffed a $46 bn proposal from Monsanto last August, the Swiss group’s chairman predicted that there would have been more dealmaking to come in the agribusiness industry. He could have not been more right. On Thursday the 12th of May emerged that Bayer AG, the German chemical and drugs group, is exploring a $40bn bid for Monsanto, which is best known for its genetically modified seeds. One week later, on the 19th of May, the Leverkusen headquartered company confirmed it had approached US agribusiness rival Monsanto for roughly the amount cited above. After the statement, Bayer shares fell dramatically by more than 8%, while shares in Monsanto climbed by 8.8% on the same date. If completed, the deal would represent the third agrochemical combination deal in six months after DuPont announced a merger with Dow Chemical and Syngenta was taken over by ChemChina. Furthermore, the deal would be the biggest German outbound takeover since carmaker Daimler-Benz acquired Chrysler for $38.6 bn in 1998.

 The agricultural business sector has been under pressure for several years as crop prices shrank consistently. The reduction in farmers’ income has directly negatively impacted the companies’ profits and the weak forecasts for growth has had awful consequences on share prices. Monsanto’s failure in buying Syngenta triggered a huge domino in this industry. First, Syngenta tried to merge with DuPont but without success. Then, DuPont announced a plan to merge with Dow Chemicals and break into three divisions. In the background, BASF attempted to do the same with Syngenta, but, eventually, it realized the impossibility to compete with an enormous cash offer from ChemChina ($44 bn). Consequently, the first two deals left Monsanto, BASF and Bayer scrambling for other deal options in order to compete with those giants in the new-restructured industry.

Hence, the idea of a possible combination between Bayer and Monsanto, which could mean that BASF’s agricultural business is left struggling. With a weak product line and its focus of fungicides in Europe, the Ludwigshafen-based company would face stiff competition from the other three merger groups. Specifically, the company resultant from Bayer-Monsanto merge would be much more balanced than the stand alone companies now. Indeed, in case of positive conclusion of the deal, the US group would fulfill its strategy of enhancing its chemical business, which it had previously attempted through the Syngenta bid. On the other side, for Bayer, the transaction would allow the German company to reinforce its agricultural business. Moreover, a deal would allow Bayer to complement its crop sciences franchise with Monsanto’s biotechnology (in particular regarding Genetic Modified Organisms) and seeds offerings, which include its chemical spray Roundup and its genetically modified Roundup Ready seeds. Analysts sustain it could more than double annual sales from about $12bn to $28bn and offer an opportunity to spin off the operations. If the two companies reached an agreement, Bernstein analysts estimate synergies of about $1.5bn by 2020. Consolidation would shrink the number of players, with Bayer-Monsanto accounting for about 25% of world’s agrochemicals market and roughly 30% of the seeds market, as shown in the graph below.


However, not all judgements concerning this plausible operation are positive. First of all, McKynsey’s analysts argue that an enlargement of the pipeline (i.e. the number of industries and, thus, of products) is not what Bayer’s shareholders desire and, indeed, the reaction of the market has not been welcoming. On the contrary, they consider crucial to strengthen its core business: the healthcare. Notoriously, Bayer has become famous worldwide for Xarelto, a blood thinning drug and, above all, Aspirin. Secondly, it is debated the way to finance such a large deal. An equity-based transaction should be the best way. Unfortunately for Bayer, ChemChina has illustrated a different method paying in cash for acquiring Syngenta with a premium of 22%. If Bayer were to do that, the resulting company would have $69bn of debt, roughly 4 times the EBITDA. Quite an uncomfortable index. Thirdly, this operation may arise considerable antitrust oppositions. Indeed, it should be validated by competition and regulatory authorities. However, it seems there is just a minor revenues overlapping indeed Monsanto’s focus is on seeds and “traits”- developing crops characteristics such as drought tolerance or insect resistance- whereas Bayer’s agriculture business is more on crop protection, such as herbicides. Therefore, the deal seems complementary and, as a result, in conformity with the EU law.

To conclude, as far as the author is concerned, two main insights emerge. First of all, it should be highlighted that technology, of whatever type, has been making industries’ borders always more and more blurred. After all, Bayer was born as a pharmaceutical company and now has enlarged its pipeline to agribusiness. Other examples are easily recognizable such as Siemens entering in healthcare or Google playing a role in the automotive industry, thanks to its driverless technology. Secondly, it must be said that talking about competition and antitrust in certain industries may seem inadequate. From this author’s point of view, there are some industries, with high entrance barrier both financial and of knowledge, where full competition simply does not exist.  In these industries there is always an intrinsic advantage in merging and acquiring until the market consists of 2 or 3 players. In this regard, agribusiness seems a natural oligopoly. Another example rather hot may be represented by the telecommunication industry in the UK (see article written by Federica Sestili on the 8th of March).

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