by Johannes Koch

Bayer AG offered $62 billion to buy Monsanto Co., deepening investor concern that it’s stretching its finances to become the world’s biggest seller of seeds and farm chemicals.

The May 10 written proposal to Monsanto offered $122 a share in cash, the Leverkusen, Germany-based company said in a statement on Monday. Bayer’s stock dropped as much as 4.1%, extending losses since the potential deal was first revealed. Monsanto shares posted muted gains, rising 6% to $107.67 in New York trading, signaling that investors remain skeptical about the deal.

Bayer AG offered to buy Monsanto for $62 billion. (Photo: mindscanner/Thinkstock)

“I don’t think they will get it at $122 because I don’t think Monsanto will accept that price,” Andrea Williams, a fund manager at Royal London Asset Management Co., said in an interview. “The danger is that you start then having discussions about how you are going to fund the higher offer, because they are already stretching the balance sheet.”

Buying St. Louis-based Monsanto would allow Bayer to tap growing demand at a time when farmers must boost productivity to feed an estimated 10 billion people globally by 2050. Bayer Chief Executive Officer Werner Baumann is hoping that rationale will win over skeptical investors -- and overcome a public backlash at home against Monsanto’s genetically modified seeds -- as he seeks to pull off the biggest corporate takeover ever by a German company after less than a month at the helm.

“The agriculture industry is at the heart of one of the greatest challenges of our time: How to feed an additional 3 billion people by 2050. The number represents about six times the population of Europe today,” Baumann said in a Monday conference call.

Rights offer

The two companies are engaged in “constructive discussions,” the CEO said.

The offer, which values Monsanto’s equity at about $53 billion, represents a 37% premium to the May 9 closing price of $89.03, the day before the offer was made. The payment would be funded with a combination of debt and equity, with about $15.5 billion coming from selling shares to existing investors. Bayer doesn’t envisage selling any assets to fund the purchase, Baumann said.

China National Chemical Corp., or ChemChina, won over Syngenta AG in February by valuing the Swiss company at more than 16 times earnings before interest, taxes, depreciation and amortization, Susquehanna Financial Group analyst Don Carson said in a note Thursday. A similar multiple means Bayer would need to offer $145 a share for Monsanto, he wrote then, a price that would value the U.S. company’s equity at $63 billion.

Baumann says Monsanto is "perfect match" for Bayer -- >>>

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‘Uneducated reaction’

Bayer fell 4% to 85.98 euros, the lowest since October 2013, as of 3:08 p.m. in Frankfurt. The stock plunged by the most in seven years on Thursday when it confirmed having made an offer, without disclosing the financial details. Monsanto hasn’t responded to the offer publicly, beyond saying that it was reviewing the terms.

“What we saw last week was an uneducated reaction in the media and the press because we did not communicate the details of our proposal,” Baumann said on a conference call on Monday. “We are utterly convinced of the rationale” of the proposal.

“Monsanto is a perfect match to our agriculture business,” he said during the call. “It would combine complimentary skills with minimal geographic overlap. We at Bayer have a leading position in crop protection and Monsanto is extremely strong in seeds and traits. So jointly, we will be an innovation powerhouse to address farmers’ future needs.”

The deal would create value not only for shareholders, but also customers and employees of both companies, Baumann said.

A deal would add to core earnings per share by a mid-single-digit percentage in the first full year after completion, and a double-digit percentage thereafter, Bayer said. The German company also expects earnings to be bolstered by savings of about $1.5 billion from the fourth year following the deal.

Monsanto said on Thursday it was consulting financial and legal advisers. In a note to clients, Citigroup Inc. analysts Peter Verdult and Andrew Baum said they “would be surprised if Bayer’s first proposal was accepted outright.”

Baumann said, “Monsanto CEO Hugh Grant recently told me personally that a combination of seeds, traits and crop protection is the winning formula in our industry and I could actually not agree more. We are absolutely aligned on how to take our businesses forward.”

Bayer would likely abandon Monsanto name. --- >>>

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Abandoning name

Bayer would likely abandon the Monsanto name after the purchase, like it has with previous acquisitions, according to a person familiar with the matter. This could help distance the enlarged company from Monsanto’s reputation, the person said.

The company’s North American headquarters and global seeds and traits division would be in St. Louis, according to Bayer. The global crop protection and crop science division headquarters would be in Monheim, Germany. The company’s digital farming division would be based near San Francisco, California. Bayer emphasized several times that it’s too early to discuss an integration timeline.

The offer marks a reversal of roles for Monsanto. The company previously sought to buy Swiss pesticide maker Syngenta AG, but abandoned the $43.7 billion bid in August after the other company refused to agree to a deal.

The crop and seed industry is being reshaped by a series of large transactions. China National Chemical Corp. agreed in February to acquire Syngenta for about $43 billion. Meanwhile DuPont Co. and Dow Chemical Co. plan to merge and then carve out a new crop-science unit. The kind of genetically modified seeds that Monsanto started to sell two decades ago now account for the majority of corn and soybeans grown in the U.S.

Bank of America Corp. and Credit Suisse Group AG are advising Bayer and support the financing of the deal, while Rothschild has been retained as an additional financial adviser.

“The disclosed price is at top end of the limit and just about works out,” said  Markus Manns, who oversees almost $300 million at Union Investment GmbH, including Bayer shares. “Should it rise any further, which appears probable, the takeover will become increasingly unattractive.”

--With assistance from Phoebe Sedgman and Kristen Hallam.

To contact the reporter on this story:

Johannes Koch in Berlin at [email protected]

To contact the editors responsible for this story:

Chitra Somayaji at [email protected]

Marthe Fourcade

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