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Moody's downplays anti-trust threat to Bayer's Monsanto takeover

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Credit rating agency Moody's said that though the takeover of Monsanto by the German chemical giant Bayer could require the sale of some overlapping businesses, the disposals were "not material" to the businesses.

Moody's said the transaction is "likely to be scrutinised by antitrust authorities around the world, and particularly in the European Union and US, given the wave of consolidation in the global agribusiness industry".

The sector is seeing a number of big mergers, including that of Dow Chemical with DuPont, and the acquisition by ChemChina of Syngenta.

Market scepticism

Bayer has agreed to pay $128 per share for Monsanto.

But shares are currently trading at around $102, indicating considerable scepticism as to whether the deal can get past legislators.

A key factor will be the extent to which Monsanto and Bayer's businesses overlap. In sectors where each of the companies have significant market share, regulators may balk at the dominance of the combined entities.

In particular, Bayer must content with European Union anti-trust bodies, which are also scrutinising the other major deals in the sector.

Disposals may be necessary

As a result, the sale of portions of one or the other business may be necessary.

"Bayer has committed to make disposals that would reduce net sales of the combined business by up to $1.6 billion, if required by regulatory authorities," Moody's said.

"We believe that although regulators may require some disposals to reduce the combined group's market shares in cotton or canola seeds, or glyphosate herbicide, these overlaps are not material to the combined businesses," Moody's said.

And so confident is Bayer of completing the purchase, that it has committed to a reverse break-up fee of $2bn payable to Monsanto should the deal fail.

Sound strategy

Moody's said the deal, which will create the world's largest seeds and chemicals company, makes "sound strategic sense".

"Their combined portfolio will be broad-based and well-balanced across indications and crops, putting the company in a good position to make a strong integrated offer to farmers."

"The deal makes sense at a time when the agrochemical sector has been hurt by declining commodity prices as a result of successive bumper harvests in key countries such as the US and Brazil, and lower farming income," Moody's said.

Threat from debt levels

But Moody's did warn of the potential effect of the acquisition on Bayer's debt levels.

"Although Bayer intends to partly fund the transaction with equity, the acquisition will lead to a significant rise in its leverage," Moody's said.

"We estimate that Moody's-adjusted total debt to EBITDA for the combined group would rise to around 4.0x at the end of 2017," the agency warned.

Strong cash flow generating capacity was seen reducing Bayer's debt after the acquisition.

"We estimate that Bayer should be able to reduce total debt to EBITDA to close to 3.0x… by the end of 2019," Moody's said.

Moody's does not expect the deal to result in a rating downgrade of more than two notches, from Bayer's current A3 rating.

By William Clarke

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