Coverage: Bayer is buying Monsanto in $66 billion deal

Bayer AG announced Wednesday that it will acquire Monsanto Co. for $66 billion in one of the biggest deals ever, but there’s some concern about whether regulators will approve transaction.

Diane Bartz and Greg Roumeliotis of Reuters examined the politically charged landscape:

Monsanto and Bayer “have chosen to do a deal in the year of merging dangerously,” said David Balto, a former policy director at the U.S. Federal Trade Commission. “They are in for a tough time.”

U.S. Senate Judiciary Committee Chairman Chuck Grassley has called a hearing next Tuesday to scrutinize the wave of consolidation. Farmers in Iowa, the Republican senator’s home state, are worried that seed and chemical costs are rising while grain prices are near their lowest levels in years. Farm incomes have plunged.

Senator Bernie Sanders, who recently ended a run for the Democratic presidential nomination, called the deal “a threat to all Americans.”

“These mergers boost the profits of huge corporations and leave Americans paying even higher prices,” he said.

Senators Mike Lee and Amy Klobuchar, the two top antitrust lawmakers, also expressed concern. “The transaction has the potential to result in a significant loss of competition and reduced incentives and ability to innovate, thereby raising prices,” said Lee, a Republican from Utah.

Beth Kowitt of Fortune noted Bayer offered Monsanto a $2 billion breakup fee:

But the most telling number may be the $2 billion breakup fee that Bayer is offering Monsanto if the deal does not pass regulatory hurdles. This is only $500 million higher than Bayer’s offer in July, which Monsanto rejected. The figure suggests Bayer is not fully confident that officials in the U.S. and Europe will bless the merger. “Our interpretation is that Bayer has concerns about the possibility of a [deal] breakup, too, and just wasn’t going to go higher,” says Bernstein analyst Jonas Oxgaard. The breakup fee is “very low by every comparable metric.”

In July I wrote that the then-offered breakup fee of $1.5 billion, at 2.3% of the total price, was in the usual range of 3% of the total deal value. The new offer brings the breakup fee to 3% of the deal’s value. But these are unusual times in agriculture as the industry’s behemoths rush to consolidate amid a bruising low in the industry’s cycle. In such an environment, higher breakup fees have been common.

In a note earlier this month, Oxgaard wrote that he expected the Bayer-Monsanto breakup fee to rise to $2.5-$5 billion. He based that prediction on other recent deals in the sector. Monsanto started the deal-making frenzy when it began its pursuit of Syngenta last year; at the time it offered a $3 billion break-up fee, which was more than 6% of the deal price.

On a call with media this morning, the companies’ executives declined to answer questions about potential regulatory challenges, saying they did not want to “preempt regulatory discussions.” Monsanto CEO Hugh Grant did say that the “overlaps are minimal” and that he is “confident that we can conclude this transaction” by the end of 2017.

Jacob Bunge of The Wall Street Journal examined the European regulatory hurdles:

The European Union, which in August opened an investigation into the merger between rival seed suppliers Dow Chemical Co. and DuPont Co., had signaled it would closely scrutinize a Bayer-Monsanto deal months before the companies agreed to terms.

Also under scrutiny is the planned sale of Swiss pesticide and seed maker Syngenta AG to China National Chemical Corp., a state-owned company that also maintains a big generic crop chemicals business. A quarter of Syngenta’s sales come from North America.

Bayer agreed as part of Wednesday’s deal to pay Monsanto $2 billion if it fails on regulatory grounds.
Bayer plans to pay $128 a share for Monsanto in an all-cash transaction, up from its latest offer last week of $127.50 a share, the companies said. The price represents a roughly 5% increase over Bayer’s original offer in May of $122 a share. Including debt, the deal is valued at about $66 billion.

EU Antitrust Chief Margrethe Vestager, responding to concerns raised by some European lawmakers, had said in June that her agency would look into the potential impact on seed prices and availability, as well as crop research and development.

Ms. Vestager said the EU would take into account the fact that several mergers in the sector would be taking place at the same time. Officials have said the mergers could place a significant share of the corn-seed and pesticide market in the hands of just the three companies.