Fitch: Bayer-Monsanto Combination Challenged

NEW YORK--()--A potential combination of chemical companies Bayer AG and Monsanto Company makes strategic sense given their complementary strengths, according to Fitch Ratings. However, Monsanto has a viable go-it-alone strategy to drive growth and Bayer is a larger, more diversified company whose growth is not solely dependent on agricultural drivers.

On Wednesday, Monsanto said it had received an unsolicited, nonbinding proposal from Bayer AG for a potential acquisition. The company said its board of directors is reviewing the proposal, but there was no assurance of entering into any transaction.

A merger this size, with a combined market capitalization greater than $125 billion, would result in crop protection, US soybean seeds and US corn seed market shares in excess of 25%, almost certainly drawing regulatory scrutiny and posing antitrust obstacles. However, the businesses are largely complementary, with herbicides the only potential concern.

Monsanto had been rumored to be looking for acquisitions or other business combinations with all of the major European crop chemicals producers following its thwarted buy of Syngenta last year. Since Monsanto's bid for Syngenta collapsed, the company has undertaken restructuring and cost savings initiatives expected to yield annual savings of $500 million. Much of Monsanto's growth prospects relate to its seeds and traits pipeline.

Six companies dominate agrochemicals, with three, Monsanto, DuPont and Dow, domiciled in the US, and three, Syngenta, Bayer and BASF, domiciled in Europe. Consolidation has been driving the industry with these six acquiring more than 200 companies since the mid-1990s. Recent transactions include Monsanto's failed bid for Syngenta in 2015 (Syngenta accepted ChemChina's $44 billion offer in February 2016) and the Dow-DuPont merger announced in December.

Monsanto has the largest seed and traits business of the big six but both Syngenta and Bayer have large insecticide and fungicide product portfolios, which would be complementary, as would BASF's, although it has a smaller portfolio. Monsanto and BASF have a cooperative history dating from a 2007 10-year joint research and development (R&D) and commercialization collaboration in plant biotechnology aimed at developing higher yielding crops that are tolerant to environmental stresses.

Monsanto's 2015 bid for Syngenta would have provided structural synergies from a change in domicile, broadened crop protection chemicals products and allowed more targeted R&D. Seed divestitures were intended to satisfy antitrust requirements as well as to repay financing. A transaction with Bayer could have similar benefits.

Despite challenges, further consolidation in the agricultural chemical space seems to have been stimulated by earnings headwinds following challenges to farmers from high crop stocks, low crop prices and, in Brazil, tight credit and currency challenges. For agricultural chemicals and seeds, there are lengthy governmental approval processes (and patents) which figure into M&A assessments but may be temporarily overshadowed by macro events in share price valuations.

The focus on portfolio activity in the chemicals space has also been intensified by shareholder activism, but it seems to have been a feature of the industry over the long haul. Fitch believes attractive niche products or capabilities, cheaper buy versus build integration considerations, management's belief in its ability to leverage its R&D or marketing ability on the target's products or programs and, more recently, the ability to change domicile for a lower tax burden, drive strategic acquisitions.

Financial buyers have been players in the space given free cash generation of assets no longer considered core by larger, more diversified companies.

Additional information is available on www.fitchratings.com.

The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article, which may include hyperlinks to companies and current ratings, can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings.

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Contacts

Fitch Ratings
Monica Bonar
Senior Director
Corporates
+1 212-908-0579
Fitch Ratings
33 Whitehall Street
New York, NY
or
Kellie Geressy-Nilsen
Senior Analyst
Fitch Wire
+1 212-908-9123
or
Media Relations
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Contacts

Fitch Ratings
Monica Bonar
Senior Director
Corporates
+1 212-908-0579
Fitch Ratings
33 Whitehall Street
New York, NY
or
Kellie Geressy-Nilsen
Senior Analyst
Fitch Wire
+1 212-908-9123
or
Media Relations
Alyssa Castelli, +1 212-908-0540
alyssa.castelli@fitchratings.com