Coverage: Bayer makes unsolicited offer for Monsanto

German drug and chemicals company Bayer has made an unsolicited takeover offer to U.S. seeds company Monsanto, although terms were not disclosed by either company.

Greg Roumeliotis and Mike Stone of Reuters had the day’s news:

The $42 billion market capitalization of Monsanto means that the deal would be likely to eclipse ChemChina’s planned acquisition of Swiss agrichemicals company Syngenta — a target Monsanto itself pursued last year — and could face U.S. antitrust hurdles.

A Monsanto statement said that its board was reviewing the proposal, which is subject to due diligence, regulatory approvals and other conditions. There is no assurance that any transaction will take place, it added.

Bayer shares dropped more than 8 percent to a 2-1/2 year low of 88.39 euros in early Thursday trading, with some investors worried by the potential cost of a deal.

Monsanto shares were seen 7.6 percent higher at $104.50 in pre-market trades.

UBS Global Asset Management, which Reuters data shows is among Bayer’s 30 biggest investors, said it was “deeply concerned” about the burden on Bayer’s finances from a takeover, saying it would prefer the companies to agree a joint venture or a nil-premium merger.

Jacob Bunge and Jesse Newman of The Wall Street Journal focused on the deal’s hurdles:

Any further industry consolidation would likely require antitrust authorities at the U.S. Department of Justice and the European Commission to alter their analyses of the agriculture sector’s already-announced deals, said Andre Barlow, partner at Doyle, Barlow & Mazard PLLC, who advises companies on merger reviews but isn’t involved in any of the agricultural deals.

“The Dow-DuPont and ChemChina-Syngenta [deals] raise their own issues, but the DOJ will have to examine how all three deals impact the competitive landscape going forward in seeds and crop protection,” Mr. Barlow said.

The Justice Department didn’t respond to requests for comment.

Following these deals, a potential combination of Bayer and Monsanto would put 83% of U.S. corn seed sales and 70% of the global pesticide market under the control of the three consolidating companies, raising fears from the agricultural sector at a time when farmers face heavy pressure after three years of sliding crop prices.

“There will almost certainly be much less competition in the marketplace, and as a direct result of that farmers will end up paying higher prices than they otherwise would be paying,” said Roger Johnson, president of the National Farmers Union, a Washington-based lobby group for farmers and ranchers.

Oliver Staley of Quartz noted the deal is thousands of years in the making:

Agriculture is the ultimate mature industry.

Homo sapiens have been tilling the soil for millennia, and we’ve gotten pretty good at it, increasing productivity so that farmers now feed a global population of 7.4 billion. For centuries, most of that productivity came through the expansion of arable land. (You can see the spread of crop land in a cool animation here). But here’s the thing about land: They’re not making any more of it, and we’re close to maxing out the real estate available for farming. We’ve also become aware of the importance of other uses of land—such as regulating the climate—so efforts to carve out new crop and pasture land from places like the Amazon are rightly contested.

That means most of the productivity gains in the last decades have come from making existing land more efficient, through genetics that increase the number of crops per year, and from fertilizers and pesticides that increase the yield per acre. That push for efficiency has given rise to the modern agricultural industry, dominated by food giants like Cargill and Archer-Daniels-Midland, and crop science companies like Monsanto and Bayer. Monsanto, a $42 billion seed producer, acknowledged today (May 19) it received a takeover offer bid from Bayer.

As agricultural productivity increases, efficiency grows and, as in all mature industries, margins contract. (Cargill, for example, reported profits of just $1.6 billion on sales of $120 billion last year). With gains from technology diminishing, consolidation is one of the few area left for the ag industry to wring future growth. Just as family concerns have been snapped up to form mega farms, the crop science business is ripe for mergers.