Bayer Lucky General Wins Recruits for $66 Billion Monsanto
(Bloomberg Gadfly) -- Werner Baumann caused a mighty stink when he launched a pricey takeover bid for Monsanto Co. just weeks after becoming CEO of German pharma group Bayer AG in May 2016. He turns out to be a lucky general.
The deal to create a world leader in crop science has won U.S. Justice Department approval, the Wall Street Journal reported on Monday. Monsanto, best known for genetically modified seeds, jumped to just below the $128 a share offer price, while Bayer stock enjoyed its biggest gain since 2015.
A lot has happened in the last two years and the deal looks much more affordable for Bayer now. The all-in cost will probably be about $4 billion cheaper than the initial $66 billion as Monsanto's net debt has fallen. The euro's strengthening against the dollar has boosted Bayer's buying power. Of an initially anticipated $19 billion of equity financing, only about $8 billion remains to be found through a rights issue, reckon analysts at Bernstein.
Monsanto also looks better value. Take its stock price before Bayer's interest surfaced and peg it to global agricultural shares and it would be trading at around $111 -- 23 percent higher.
Satisfactory returns look within reach too. Bayer expects $1.2 billion of cost synergies after three years. Combine these with the latest forecasts for Monsanto's operating profit for 2020, and the return on invested capital should be roughly 7 percent, in line with the target's cost of capital. That is before revenue synergies.
Despite this, Bayer stock, at about 98 euros, has done no better than its European pharmaceuticals peers and has lagged German blue chips.
It trades on an enterprise value to forward Ebitda multiple of 9 times, a 22 percent discount. Bernstein values the standalone business at 113 euros per share, and the combined Bayer/Monsanto at 124 euros after ascribing a 12.5 times multiple to the enlarged crop science division.
Investors seem indifferent to the takeover. Perhaps they've given up thinking about it as the approval process has dragged on so long. The impending rights issue may weigh.
If Bayer lands this deal, it will become a leading agriculture company, plus a pharmaceutical business with a weak pipeline. It's an odd hybrid. But it looks better placed now to invest in fixing the pharma side, and it will be the pre-eminent force in crop science.
Yes, Bayer shareholders should still gripe that they don't have a vote on the transaction and that Baumann took a huge gamble. But if his luck continues, they may yet find themselves on the better side of the deal.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
Chris Hughes is a Bloomberg Gadfly columnist covering deals. He previously worked for Reuters Breakingviews, as well as the Financial Times and the Independent newspaper.
To contact the editor responsible for this story: James Boxell at jboxell@bloomberg.net.
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