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By Christopher Alessi and Eyk Henning
FRANKFURT -- Bayer AG said it remained committed to its pursuit
of Monsanto Co., but the U.S. seed-and-pesticide giant's rejection
of its $62 billion takeover offer may leave little room for
maneuver.
As Bayer ponders its next move, investors and analysts are
questioning how much the big German drug and chemical maker could
afford to raise its all-cash, $122-a-share bid.
Some investors said Wednesday that offer was already a stretch
for Bayer, and that the company isn't in a position to increase it
materially because its stock has plummeted more than 12% since news
of the takeover effort surfaced about two weeks ago. On Wednesday,
the shares closed unchanged at EUR87.15 ($97.10) in Frankfurt
trading.
To clinch a deal creating the world's largest agrochemicals
company, Bayer would have to craft a new bid high enough to satisfy
Monsanto but not rich enough to spook its own shareholders,
investors and analysts said.
Monsanto, the world's top seed producer, said Tuesday that
Bayer's current proposal "significantly undervalues" the company
and is "financially inadequate." But Monsanto Chief Executive Hugh
Grant said there could be "substantial benefits" to a tie-up with
Bayer, and that the U.S. company was open to further talks.
Bayer, a leading producer of crop chemicals, responded by
reiterating its bid and expressing confidence it could address
Monsanto's financial and regulatory concerns.
"Bayer remains committed to working together to complete this
mutually compelling transaction," Bayer CEO Werner Baumann said
Tuesday night.
Mr. Baumann, a 28-year Bayer veteran who stepped in as CEO just
over three weeks ago, has been trying to sell shareholders on the
proposed takeover, which some fear would saddle the company with
too much debt.
At a lunch meeting with several investors in London on Tuesday,
Mr. Baumann characterized the deal as the last crucial step in the
global consolidation of the agrochemical industry, which he said
could solidify the sector for decades, according to people familiar
with the matter.
These people said Mr. Baumann also responded to investors who
would have preferred a large pharmaceutical-sector acquisition,
saying most available targets wouldn't help Bayer's pipeline and
cash profile much.
Analysts and investors said Bayer might have to raise its offer
to at least $135 a share to interest Monsanto, forcing the German
company to enact a much higher capital increase than it initially
suggested.
Such a move likely wouldn't require Bayer to seek shareholder
approval for a bid. Bayer's management board can issue up to 35% of
Bayer's outstanding capital to shareholders for cash without
shareholder approval, according to a resolution at its annual
meeting last year. The company could also issue convertible
bonds.
Bayer said it would finance its current bid, which represents a
37% premium to Monsanto's closing price on May 9, with a
combination of debt and equity, including a share sale valued at
around 25% of the total transaction value. That means the company
would launch a capital increase of around $15.4 billion. Bayer's
market capitalization is $80 billion.
Bayer needs to persuade shareholders the deal makes sense and
comes at the right price to prevent its share price from falling
further.
At least initially, investors voiced skepticism not just about
the price but also about whether the acquisition would tip the
company's business too far toward crop science, and away from its
health-care roots.
"It's a concern that crop science would become a very large part
of the company," said Markus Manns, a portfolio manager at Union
Investment, a Bayer shareholder. Mr. Manns said Bayer's
pharmaceutical and over-the-counter drug businesses were more
attractive to investors because the agrochemical division tended to
be more volatile.
Investors also expressed doubts about the size of Bayer's
target. "If Bayer were to find a 'mini-Monsanto,' it would make
more sense," said Mr. Manns.
"Monsanto is a good company and the deal seems to be a good fit,
as both companies have a strong position in different markets and
different product ranges that complement one another," said another
Bayer investor. This person added, however, that the current price
is "quite high" and "Monsanto is so big that it might be hard to
integrate the company."
With the addition of Monsanto, Bayer's crop-science business
would account for about half of the company's revenue, analysts
say. Last year's total group sales were EUR46.3 billion, including
EUR10.37 billion in revenue from its crop-science operation.
Former Bayer CEO Marijn Dekkers, who stepped down at the end of
April, built up Bayer's health-care profile by presiding over the
launch of five new blockbuster drugs and the $14.2 billion
acquisition of U.S.-based Merck & Co.'s consumer-care
business.
At the same time he sought to focus Bayer more squarely on its
so-called life-science businesses, including health care and
agrochemicals. As part of that effort, Mr. Dekkers late last year
spun off part of the group's specialty-plastics business, now known
as Covestro AG.
Bayer's bid for Monsanto comes after major deals were struck in
recent months by rival seed developers Syngenta AG, Dow Chemical
Co. and DuPont Co. Analysts have concluded this would be Bayer's
last chance to participate in that deal-making frenzy.
Write to Christopher Alessi at christopher.alessi@wsj.com and
Eyk Henning at eyk.henning@wsj.com
(END) Dow Jones Newswires
May 26, 2016 02:48 ET (06:48 GMT)
Copyright (c) 2016 Dow Jones & Company, Inc.