FRANKFURT German drugs and crop chemicals group Bayer has offered to buy U.S. seeds company Monsanto for $62 billion in cash, defying some of its own shareholders in a bid to grab the top spot in a fast-consolidating farm supplies industry.
Monsanto Co's stock rose 5 percent to $106.61 by midday trade on the New York Stock Exchange - well below Bayer's offer price, in a sign that it faces a tough task convincing the St. Louis-based company's shareholders to sign off on the deal.
The non-binding bid was made to Monsanto's management on May 10, Monsanto has said it would review the proposal. Some analysts have said Bayer might still have to pay more.
"The price that has now been disclosed is at the upper limit and it is just about economical. Should it rise further, which is to be assumed, the takeover will become increasingly unattractive," said Markus Manns, a fund manager at Union Investment, Bayer's 14th biggest investor
Bayer shareholders have also responded coldly to the company's pursuit, condemned by one Bayer investor as "arrogant empire-building" when news of the proposal emerged last week.
The unsolicited proposal would be the largest all-cash takeover on record, according to Thomson Reuters data, just ahead of InBev’s $60.4 billion offer for Anheuser-Busch in June 2008.
The move would also eclipse a planned combination of peers Dow Chemical and DuPont's agriculture units and comes just three weeks after Werner Baumann took over as Bayer CEO.
Giving details for the first time, Bayer said on Monday it would offer $122 per share, a 37 percent premium to Monsanto's stock price before rumours of a bid surfaced.
"We fully expect a positive answer of the Monsanto board of directors," Baumann told reporters on a conference call, describing criticism from some investors as "an uneducated reaction in the media" when deal terms were not yet known, and driven by an element of surprise.
Monsanto, which said last week it had a received an approach from Bayer but gave no details, has yet to comment on the offer. The company did not immediately return a call seeking comment on Monday.
Antitrust experts see an overlap in the seeds business, particularly in soybeans, cotton and canola. Bayer's LibertyLink line of weed killers, plus crops that are resistant to it, are an important alternative for farmers suffering from weeds that have grown resistant to Monsanto's Roundup herbicide.
Shares of Bayer, which had already fallen 14 percent since rumours of a bid emerged last week, dropped as much as 5.4 percent on Monday to a new 2-1/2 year low of 84.68 euros.
Global agrochemicals companies are racing to consolidate, partly in response to a drop in commodity prices that has hit farm incomes and also due to the growing convergence between seeds and pesticides markets.
ChemChina is buying Switzerland's Syngenta for $43 billion after Syngenta rejected a bid from Monsanto, while Dow and DuPont are forging a $130 billion business.
With German rival BASF also looking into a possible tie-up with Monsanto, Bayer has moved to avoid being left behind.
Baumann rejected suggestions from some investors that Bayer should instead try to forge a joint venture with Monsanto, saying this would have tax disadvantages.
Sources close to the matter have said BASF is unlikely to start a bidding war with Bayer. BASF declined to comment on Monday.
But analysts say Bayer might still have to pay more to persuade Monsanto and its shareholders to sell up.
That could be a problem, with some saying Bayer's proposal, at 15.8 times its earnings before interest, tax, depreciation and amortisation (EBITDA) for the year ended Feb. 29, is already a stretch for the German company.
Berenberg analyst John Klein said Monsanto and its shareholders were likely to argue that based on 2017 EBITDA expectations, the bid would represent a multiple of only 14 times, compared with the nearly 16 times ChemChina agreed to pay for Syngenta.
When pressed by analysts whether Bayer might sweeten its bid, Baumann said the offer reflected Monsanto's value.
"We are putting forward a very, very full price," he said.
Bayer said it would finance the bid with a combination of debt and equity, primarily a share sale to existing investors. Equity would account for about a quarter of the deal value.
Equinet analyst Marietta Miemietz, who has a 'buy' rating on Bayer stock, said the extra debt appeared manageable but could limit Bayer's ability to invest in its healthcare business, which some analysts think needs a boost to its drugs pipeline.
Baumann said Bayer would continue to develop its healthcare arm, which includes stroke prevention pill Xarelto and aspirin, the painkiller it invented more than a century ago.
"We are not feeding Peter by starving Paul here," he said, adding no asset sales were planned to help pay for the deal.
Bayer also forecast synergies from a deal with Monsanto would boost annual earnings by around $1.5 billion after three years, plus additional future benefits from integrated product offerings - a reference to its push to combine the development and sale of seeds and crop protection chemicals.
Berenberg analysts, who have a 'buy' rating on Bayer shares, described the synergies estimate as "very ambitious".
(Additional reporting by Maria Sheahan, Patricia Weiss and Michael Flaherty; Editing by Edwina Gibbs and Mark Potter)
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Updated Date: May 24, 2016 00:15 AM