Bayer's Monsanto acquisition to face politically charged scrutiny

© Reuters. Monsanto logo is displayed on a screen where the stock is traded on the floor of the NYSE

By Diane Bartz and Greg Roumeliotis

WASHINGTON D.C./NEW YORK (Reuters) - As the global agricultural sector races to consolidate, Bayer (DE:BAYGN) AG's $66 billion all-cash deal to acquire Monsanto (NYSE:MON) Co will test growing political and consumer unease in the United States and abroad over the future of food production.

Bayer’s pesticide-focused agricultural business has few overlaps with Monsanto's dominant seed franchise, according to the companies' executives. Still, marrying two of the world's top farm suppliers at a time when rivals are also merging is fueling concern over reduced competition in the $100 billion global market.

Monsanto and Bayer "have chosen to do a deal in the year of merging dangerously," said David Balto, a former policy director at the U.S. Federal Trade Commission. "They are in for a tough time."

U.S. Senate Judiciary Committee Chairman Chuck Grassley has called a hearing next Tuesday to scrutinize the wave of consolidation. Farmers in Iowa, the Republican senator's home state, are worried that seed and chemical costs are rising while grain prices are near their lowest levels in years. Farm incomes have plunged.

Senator Bernie Sanders, who recently ended a run for the Democratic presidential nomination, called the deal "a threat to all Americans."

"These mergers boost the profits of huge corporations and leave Americans paying even higher prices," he said.

Senators Mike Lee and Amy Klobuchar, the two top antitrust lawmakers, also expressed concern. "The transaction has the potential to result in a significant loss of competition and reduced incentives and ability to innovate, thereby raising prices," said Lee, a Republican from Utah.

Monsanto agreed to sell itself to Bayer for $128 per share in cash, yet its shares hovered around $107 Wednesday, reflecting investor uncertainty about regulators. Bayer has agreed to pay Monsanto a $2 billion breakup fee if the deal is thwarted.

The German company aims to create a one-stop shop for seeds, crop chemicals and computer-aided services to farmers.

That was the idea behind Monsanto's swoop on Syngenta AG (SIX:SYNN) last year. The Swiss company fended off that offer only to agree later to a takeover by China's state-owned ChemChina.

U.S. chemicals giants Dow Chemical (NYSE:DOW) Co and DuPont (NYSE:DD) plan to merge and spin off their seeds and crop chemicals operations into a major agribusiness.

If all these deals close, three companies would control nearly 70 percent of the world's pesticide market and 80 percent of the U.S. corn-seed market.

In addition, Canadian fertilizer producers Potash Corp of Saskatchewan Inc and Agrium Inc said on Monday they agreed to merge, sparking questions of whether regulators will sign off on the new company's potential pricing power.

INEVITABLE SCRUTINY

It has been a tough year for aggressive mega-deals. Antitrust authorities have challenged agreements ranging from oilfield services mergers to health insurance buyouts. Other regulators have cracked down on deals that aid tax avoidance or risk harming national security.

The Monsanto and Bayer deal, which would be the largest-ever all-cash acquisition, faces intense and lengthy regulatory processes in the United States, the European Union and elsewhere, experts said.

"This merger is not a slam dunk," said Diana Moss, president of the American Antitrust Institute.

Hugh Grant, Monsanto's chief executive officer, told reporters the companies will need to file in about 30 jurisdictions.

Monsanto and Bayer have had "initial contacts with regulatory agencies describing what this combination would be about," Bayer Chief Executive Officer Werner Baumann said on an investor call, and "received encouraging feedback."

The value of assets Bayer is willing to divest is to be revealed by next week, when details of the merger agreement become public, according to sources familiar with the deal.

Areas of potential overlap include some soybeans, canola and cotton seeds.

Bayer's share of the U.S. cotton seed market sits at 38.5 percent, while Monsanto is 31.2 percent, according to data compiled by the Konkurrenz Group.

"I would have to say this: I think there will be some concern from the growers because of the consolidation," said Craig Brown, a vice president of the National Cotton Council of America. Brown said the council had taken no formal position on the proposed deal.

TOUGH YEAR

U.S. antitrust enforcers will look at more than product overlaps, said Moss.

"People don't get the enormous impact that these deals can have on innovation markets. You need more innovators in there battling it out so that you actually do produce new technology for farmers,” she said.

The deals would leave farmers facing a duopoly in seed (Bayer/Monsanto and Dow) and two big firms in chemicals (Syngenta and Bayer/Monsanto), she said.

In terms of the U.S. corn seeds and traits market, according to Morgan Stanley (NYSE:MS) Research, a merged Dow and DuPont would have about a 41 percent market share, while a merged Monsanto-Bayer would have about 36 percent. In soybean seeds and traits, the group estimated a merged Dow/DuPont would have about 38 percent. Monsanto-Bayer would have 28 percent.

The U.S. political landscape after the November federal election also will influence these ag-related deals.

Maurice Stucke, formerly in the Justice Department now with the Konkurrenz Group, called it highly unlikely that Obama administration antitrust enforcers, who have knocked down a long list of big mergers in concentrated industries this year, would make the final decision on Bayer-Monsanto.

"Merger reviews of this complexity would take six to nine months," Stucke said. "This would be the first major test of the new administration."