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Seeds of destruction

19 May 2016 By Olaf Storbeck

There is one thing BASF shareholders should fear more than consolidation between rival Bayer and U.S. seed maker Monsanto: their own board wading in with a counterbid.

Bayer’s bid for Monsanto puts BASF Chief Executive Kurt Bock on the spot. With agricultural revenues of 5.8 billion euros ($6.5 billion), the Ludwigshafen-based group is one of the world’s big players in a sector where everyone seems to be enthusiastically coupling. Think of Dow Chemical’s merger with DuPont, and Syngenta’s planned takeover by ChemChina. Of the largest global agricultural players, only BASF would be left on the shelf.

Moreover, a Bayer-Monsanto tie-up may put BASF’s collaboration with the Americans at risk. Both groups work together on research and development in plant biotechnology, giving a strong reason perhaps to spoil Bayer’s plans.

Yet the maths of BASF counterbid would be a stretch. A 30 percent sweetener on Monsanto’s undisturbed share price would mean an interloper paying up around $51 billion. That’s a premium equivalent to $12 billion. Jefferies analysts estimate that BASF could generate around $720 million of annual cost synergies from merging with Monsanto by 2020, but their $5.4 billion net present value – what they’d be worth as a lump sum today – falls far short of justifying such generosity. By leveraging up to 3.5 times the combined entities’ EBITDA, BASF could comfortably take on only around $30 billion of new debt.

Unlike BASF, Bayer sells seeds, which suggests greater room for synergies. Yet Bayer boss Werner Baumann is already struggling to convince his shareholders that an offer for the U.S. seed group makes sense, even as his company’s shares have fallen 10 percent in a week. Bock sat on his hands while other potential merger targets like Syngenta and DuPont were snapped up. He can afford to do it again.

 

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