Bayer, a drug and chemicals company in Germany, proposed an unsolicited takeover proposal of Monsanto with the goal of creating the world’s biggest agricultural supplier. The convergence of Bayer with the U.S. seeds company seeks to cash in on of the converging pesticide and seeds market.
Monsanto released a statement which was confirmed by Bayer even though both companies didn’t disclose any terms of the proposal.
The move is expected to come across U.S. antitrust issues because their $42 billion market capitalization is larger than the planned acquisition of ChemChina over Swiss agrichemicals company Syngenta.
Monsanto’s board is reviewing the proposal which is subject to due diligence, regulatory approvals and other conditions. The company is not confirming that any transactions will be made.
Bayer dropped to 88.39 euros in Thursday’s trading down 8 percent, its lowest in 2 ½ years, over investor concerns on the potential cost of the deal.
Monsanto’s shares rose to $104.5 by 7.6 percent in pre-market trade.
One of Bayer’s biggest investors, UBS Global Asset management is “deeply concerned” about Bayer’s financial health due to the takeover and prefers a joint venture or a nil-premium merger.
Analysts at Deutsche Bank said that Bayer could be moving its core business to agriculture, which would make up 55 percent of their core earnings, up from 28 percent the year previous, which excluded the Covestro chemicals business which the company plans to sell.
The change could cause negative sentiments in a healthcare-centric investor base, Deutsche Bank said.
The $90 billion chemicals company claims that the proposal aims to create “a leading integrated agriculture business” as the company seeks to combine more the development of seed sales and crop protection chemicals.
Most agrichemical companies are now turning their focus on genetically engineered crops and creating paired chemicals to be sold to farmers who wish to compete against low commodity prices.
Bernstein Research analyst Jeremy Redenius estimates that that takeover would cost 41.9 billion euros ($47 billion) including 6.7 billion euros in assumed debt. He further analyzes that Bayer would need to sell shares worth 27 billion Euros to make the sale financially feasible.
Analysts at Citi said that Bayer’s takeover price would amount to 65 billion euros which includes a 57 billion-euro debt as the company will pay 14-16 times Monsanto’s core revenues.
The sale of Covestro could raise 4 billion euros and the potential sale of its animal health business could bring in an additional 7 billion euros.
ChemChina is currently facing regulatory review in the U.S. over food supply securities.
The deal between Bayer and Monsanto would face antitrust scrutiny as it eclipses the 17 billion euro takeover of Schering in 2006 due to an overlap specifically in the soybeans, cotton and canola seed business.