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Bayer's $66bn agreed Monsanto takeover leaves investors cold

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Bayer, sweetening its bid for a third time, succeeded in winning agreement to acquire Monsanto for $66bn in the biggest takeover of the year so far, and the second mega-deal in agriculture this week.

Bayer, the German chemicals conglomerate, said it had won consent from the Monsanto board for a deal after raising its all-cash bid to $128 per share, valuing equity in the US-based seeds giant at $57bn, with debt on top.

The offer price, raised $0.50 a share from an approach revealed last week, represents a 44% premium to Monsanto shares before news of talks with Bayer emerged in May.

And the proposed deal represents a further step in the round of consolidation in the agriculture sector encouraged by margin pressure, a knock on effect of tightened farmer purse strings in the face of weak crop prices.

Earlier this week, Canadian fertilizer giants PotashCorp and Agrium unveiled a $36bn merger while, among smaller sector operators, Farmland Partners unveiled the acquisition of American Farmland.

'New era'

The deal would - in allowing the merger of Monsanto, the world's biggest seed business, with Bayer's agrichemicals-focused ag operations – encourage a "new approach" to helping tackle "one of the greatest challenges of our time, how to feed an additional 3bn people in the world by 2050", said Liam Condon, head of Bayer's Crop Science division.

World's biggest agrichemicals-seeds groups, by sales - assuming proposed deals succeed

1: Bayer-Monsanto, E23.1bn

2: ChemChina Ag-Syngenta, E14.8bn

3: Dow Ag- Dupont Ag, E14.6bn

4: BASF Ag, E5.8bn

Monsanto standalone, E12.7bn

Bayer standalone, E10.4bn

Source: Bayer. Data based on 2015 sales

Mr Grant added that the deal, "a testament to everything we've achieved and the value we have created for our stakeholders at Monsanto", offered "the most compelling value for our shareowners".

'Political pushback'

However, the announcement failed to convince investors who nudged Monsanto shares 0.5% higher to $106.68 in early deals in New York, remaining well short of the offer price, and implying doubt that the deal will be consummated.

Bayer shares were 2.0% higher in Frankfurt at E95.17.

One major concern is that the tie-up – which would create the world's top agrichemicals and seeds company, with sales of E23.1bn a year - could snag on anti-trust issues

Analysts at Bernstein Research analysts earlier this week estimated at 50% the change of the deal gaining regulatory clearance, warning that "political pushback to this deal… could provide significant delays and complications".

Bernstein flagged potential headwinds "ranging from farmer dissatisfaction with all their suppliers consolidating in the face of low farm net incomes, to dissatisfaction with Monsanto leaving the US".

'Major culture clash'

Professor John Colley at the UK's Warwick Business School said that "EU and US competition authorities will make significant demands in terms of requiring disposals and imposing trade restrictions".

Indeed, integration of Monsanto into Bayer "will not be easy.

"In addition to the major culture clash between very different approaches to business, Monsanto is large and complex.

"Reputational concerns also become an issue for Bayer," given the opposition in the European Union to genetically modified crop varieties, as championed by Monsanto.

Cost savings

Bayer, which could be liable for a $2bn payment to Monsanto if the merger fails, said that it expected to close by the end of next year, allowing the group to start work on releasing deal benefits estimated at about $1.5bn three years after the deal closes.

Most would come from cutting out duplicated administration expenses, with some scope for exploiting overlaps in research and development, and from reaping procurement benefits too.

The deal is being financed in the main by a $57bn bank facility, but with Bayer to raise a further $19bn through share and convertible bond issues.

By Mike Verdin

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