Bayer Edges Closer To A Tie-Up With Monsanto

We are on the verge of the largest all-cash deal, with Monsanto Company (NYSE:MON) expected to collaborate with Bayer (DE:BAYGN) AG (OTC:BAYRY) . However, skeptics still question whether the $130 per share deal will overcome regulatory hurdles.

Slew of Bids, But Mostly in Vain

The German chemical behemoth, Bayer, had offered $122 per share for the buyout in May 2016. The proposal was rejected by the premium U.S. genetically modified seed manufacturer, on grounds of being “insultingly low”. Bayer gradually started sweetening its bid, raising it to $125 per share in July and further to $127.50 in early September. Monsanto did not accept the revised proposals at once but kept doors open for further negotiations. Analysts believe that the latest offer of roughly $130 per share would finally satisfy the renowned U.S. GMO producer. The new tender is worth $66 billion (inclusive of debt) and entails a higher break-up fee of $3 billion.

Bayer Deal the Best Option

The drop in commodity prices has put pressure on companies like Monsanto, with farmers lowering their demand for supplies. Weaker agro-product prices are currently weighing on farmers’ income, affecting their purchasing decisions.

At this stage, companies within the global seeds, traits and agricultural chemical industry are banking on the strategy of consolidation. While E. I. du Pont de Nemours and Company (NYSE:DD) and The Dow Chemical Company (NYSE:DOW) inked a $130 million merger deal in 2015, Syngenta AG (NYSE:SYT) agreed to be bought by ChemChina for $43 billion in Feb 2016.

Monsanto has viewed itself as an exalted buyer, rather than a target. However, the company failed to acquire Syngenta and also could not establish a concrete deal with the German chemical company, BASF. Bayer’s fourth time renewed bid of $130 per share, was higher than Monsanto's closing share price on Sep 13. Thus, the deal seems to be the only credible alternative for Monsanto at present.

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Regulatory Headaches

Even though the pact between Monsanto and Bayer would turn out to be the most valued deal of 2016, it is still far from being executed.

Though Monsanto has successfully enforced Bayer to raise its bid several times, the share price of this Zacks Rank #3 (Hold) stock remained largely below Bayer’s offers. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Investors believe that the transaction would not have a smooth ride due to antitrust regulatory obstacles. The alliance between Monsanto & Bayer, Syngenta & ChemChina as well as DuPont & Dow Chemical would give rise to just a few global players within the industry. These three deals would put two-third of the global chemical and seed supply chain in the hands of only three large companies.

It is anticipated that the giant companies might manipulate prices within the industry, discouraging healthy competition. Therefore, these deals are likely to face challenges from the antitrust authorities in the near term.

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