The commercial chemical industry has found itself in a high-stakes game of musical chairs this summer, as American chemical giants Dow Chemical Company and E. I. du Pont de Nemours and Company (DuPont) decided to tie the knot in December, followed by announced nuptials between Swiss firm Syngenta and China's ChemChina. As these two mergers run the international regulatory gauntlet, Germany's Bayer AG and BASF SE, and America's Monsanto, find themselves scrambling for a chair before the final notes of the Wedding March are sounded.
Bayer, however, is desperate to avoid being the eternal bridesmaid. In May, the Leverkusen firm proposed a merger with Monsanto, offering $62 billion cash. The $122 per share offer was met with a resounding "no" from Monsanto. With experts declaring that the deal would amount to an "immediate destruction" of shareholder values, the offer went over with investors like a lead balloon. Only seven percent of shareholders surveyed on the deal were in favor of it.
None of this news was enough to slow down Bayer's new CEO Werner Baumann. The paint in his office wasn't even dry before he proposed the deal, and he shows no sign of turning back on it now. Emphasizing the "indisputable" advantages, he declares that firms must embrace change to survive. In any event, Baumann is decidedly uninterested in shareholders' opinion of the deal - he informed a group of shareholders on a conference call recently that German law is not required for the company to complete the deal. The executive didn't spare the punches, and on June 2, the company announced it had secured $63 billion in financing from five different banks. Bank of America Corp., Credit Suisse Group AG, Goldman Sachs Group Inc., HSBC Holdings Plc and JPMorgan Chase & Co. will each provide roughly $12.5 billion in short-term loans, which, crucially, include an option to be increased if Bayer decides to up its offer for Monsanto.
As to Monsanto, both management and shareholders are behind the deal, just not at that price. Monsanto let Bayer down easy, speaking of their suitor in glowing terms and describing the "substantial benefits" of such an arrangement. In the survey mentioned above, a full 84% of Monsanto's shareholders were on board with the deal in principle. However, according to the same survey, the price was inadequate - Monsanto's investors sought a price per share of something in the neighborhood of $137, arguing that Bayer's $122 offered just a $1 premium over the company's $121 stock value in mid-June 2015. In this light, the much-discussed $37 opening premium is vastly overblown. What's more, when looking at the numbers, Bayer's proposal amounts to 15.8 Monsanto's EBITDA for 2015, and shareholders have stressed that the valuation should be based on the 2017 forecast, which would only represent a multiple of 14 times -more than reasonable compared with the nearly 16 times ChemChina is paying for Syngenta. Since Bayer has the banks' blessing to increase its premium, a bigger valuation is definitely in the cards.
However, Bayer is already trying to drive down the price of the deal by weighing in on the current glyphosate debate in Europe, as Monsanto currently awaits a European Commission ruling on the legality of as glyphosate. Invented by Monsanto chemist and multiple patent holder Dr. John E. Franz in 1970, consumers know the compound by its trade name Roundup. The compound, which represents fully 32 %of Monsanto's revenue, has found itself in the center of controversy when one agency alleged it was carcinogenic, despite overwhelming scientific evidence to the contrary.
Every regulatory authority in the world has given glyphosate a clean bill of health. But a controversy was birthed from an advisory report published by the International Agency for Research on Cancer (IARC), which found that glyphosate is "probably carcinogenic to humans." However, the following November saw the European Food Safety Authority (EFSA) issue a report indicating that the substance was not a carcinogen, and a United Nation committee of Food and Agriculture Organization and World Health Organization experts issued a report declaring it unlikely that glyphosate causes cancer in humans. These latter findings from European bodies that glyphosate is essentially safe are in addition to similar findings by the German Federal Ministry of Health and the United States' Environmental Protection Agency.
Enter the politicians. With the chemical's license running out on June 30, a vote on renewing it failed in the European Commission's Committee on Plants, Animals, Food and Feed (PAFF), and since member states have been unable to reach a consensus on the matter, it was sent to the Appeals Committee on June 27 for dispensation.
As it turns out, the Appeals Committee is Baumann's ace in the hole in his negotiations with Monsanto. Although at present twenty of the PAFF's twenty-eight member states are on board with renewing glyphosate (only sixteen are needed for passage), the population of the majority of states in favor of the proposition must represent at least 65% of the EU's population. Germany is the state with the highest population, accounting for sixteen percent of the total. Thanks to an internal dispute between the agricultural minister and the Social Democratic Party, Berlin has chosen to abstain from the vote. Coupling Germany's abstention with that of France and Italy, glyphosate's chances of surviving the vote remain uncertain.
It also seems plausible that Bayer is using its political clout with the German government to ensure it abstains on the reauthorization of glyphosate, effectively seeking to drive down Monsanto's long-term revenue forecasts and force the company back to the negotiating table. With its license set to expire on June 30th, glyphosate's future today depends on Germany's internal politics, and the highly-questionable science of the IARC report, all coming at the expense of European farmers.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.