Bayer can still be saved from $66 bln splurge

September 14, 2016

The author is a Reuters Breakingviews columnist. The opinions expressed are his own. 

Bayer has finally agreed to buy Monsanto for $66 billion. Shareholders in the German pharmaceutical group don’t get the chance to vote on the takeover, but have already made their views plain. Compared with the wider market, Bayer has probably lost $7 billion in value already.

Combining the U.S. seed-maker with its German partner creates a seed-and-fertiliser giant with revenue of 23 billion euros ($26 billion) – bigger by far than its closest rival, Switzerland’s Syngenta. Yet the price of building such an impressive empire is too high. Bayer is paying a $17 billion premium to Monsanto’s market capitalisation on May 11, the day before talks between the two were first reported. Yet the value created by the deal, after taxing and capitalising the annual savings of $1.5 billion, is just $12 billion.

That value gap might explain why Bayer’s shares have flagged. As of Sept. 14, the company’s market capitalisation was slightly lower than on May 11. Yet the MSCI World Industrials and Healthcare indices are both up more than 2 percent over the same period. If Bayer shares had simply tracked the benchmark, the company would be worth over $7 billion more than it was by 1500 BST on Sept. 14, in U.S. dollar terms. Broadly speaking, that makes sense – Bayer is paying away all the benefits of the deal, and then some, to Monsanto shareholders.

The market doesn’t always get it right. And in this case, the immediate verdict doesn’t really matter, because Bayer shareholders do not get a vote on whether the tie-up goes ahead. Antitrust regulators do have a say, however. If they nix the deal, Bayer must pay Monsanto a $2 billion break free. That would be painful for the German group’s shareholders – but they would still be better off than if the seed had never been planted in the first place.

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