Bayer AG is exploring a potential bid for U.S. competitor Monsanto Co. in a deal that would create the world’s largest supplier of seeds and farm chemicals, according to people familiar with the matter.

The German firm has held preliminary discussions internally and with advisers about buying Monsanto, which has a market value of almost $40 billion, said the people, who asked not to be named because the deliberations are private.

Bayer, which is valued at about 84 billion euros ($96 billion), has discussed how to finance a deal including potential asset sales, the people said. No final decision has been made and the Leverkusen-based company could decide against a bid or pursue other transactions with Monsanto, including joint ventures or asset sales, the people said.

Representatives for Bayer and Monsanto declined to comment.

Putting the world’s largest seed maker together with the German company that invented aspirin would bring together brands such as Roundup, Monsanto’s blockbuster herbicide, and Sivanto, a new Bayer insecticide lethal to aphids and whiteflies but not to bees, as well as seeds for crops ranging from corn to sugar cane.

Monsanto rose 18% in early trading after news about Bayer’s interest and a report from StreetInsider late yesterday that BASF SE is working with advisers to explore a takeover offer. The company declined 0.9% to $90.34 in New York trading on Wednesday. Bayer shares fell 4.4% to 95.62 euros in Frankfurt trading at 2:32 p.m., the biggest intraday decline since January.

Consolidation wave

It would also help Bayer and Monsanto bolster their positions amid a wave of consolidation in the industry. Rivals Dow Chemical Co. and DuPont Co. announced last year plans to combine operations in a $130 billion transaction, while China National Chemical Corp. agreed in February to acquire Syngenta AG of Switzerland for $43 billion.

St. Louis-based Monsanto has explored possible deals with Bayer as well as German competitor BASF, people familiar with the matter said in March. Bayer and Monsanto have discussed a number of options from a full combination to the German firm selling all or part of its crop sciences business, as well as joint ventures, the people said at the time. When Bayer raised the idea of a full takeover of Monsanto in March, the U.S. firm said it was not interested in selling, and it sees itself as more of an acquirer, two of the people said this week.

If Bayer goes ahead with a bid, it would raise pressure on BASF to consider an offer, the people said.

Still, any deal would face regulatory scrutiny as the industry consolidates. Government regulators globally have nixed more than $20 billion in deals this week, including CK Hutchison Holdings Ltd.’s bid to buy Telefonica SA’s O2 wireless carrier in the U.K. and the merger of Staples Inc. and Office Depot Inc.

Ag Slump

Monsanto is grappling with a global slump in agricultural commodities after its offer to buy Syngenta for about $46.2 billion was spurned last year. Sales in the quarter ending in February declined 13% from a year earlier to $4.53 billion. Corn and soybean prices fell in the last three calendar years, cutting net farm income in the U.S. and hurting demand for everything from tractors to weedkiller.

A deal with Bayer would help the company reduce its reliance on the agriculture industry, while Monsanto would strengthen Bayer’s seed business, one of the company’s priorities. Bayer said last month that it planned to introduce new genetically modified soybean seeds in Brazil to challenge Monsanto’s dominance.

Bayer Transformation

For Bayer, the talks come as the company is transitioning to new leadership. Strategy head Werner Baumann took over from CEO Marijn Dekkers this month. Dekkers reshaped Bayer, increasing its focus on life sciences by buying Merck & Co.’s over-the-counter medicines business and divesting a stake in its plastics unit.

Bayer’s market value has almost doubled since Dekkers took the helm at the end of 2010 as the 152-year-old company sold more prescription drugs for eyes and hearts and added consumer brands like Claritin.

--With assistance from Jeffrey McCracken, Andrew Noël, Matthew Campbell, Manuel Baigorri, Simon Casey, Johannes Koch, Matthew Monks, Dinesh Nair and Ed Hammond.

To contact the reporters on this story:

Aaron Kirchfeld in London at [email protected]

Ruth David in London at [email protected]

Sheenagh Matthews in Frankfurt at [email protected]

To contact the editors responsible for this story:

Aaron Kirchfeld at [email protected]

Chitra Somayaji at [email protected]

Amy Thomson, Marthe Fourcade

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