In connection with its proposed acquisition of Monsanto, Bayer put significant crop science assets out for auction in order to smooth regulatory approvals
EXCERPT: Bayer put these assets up for sale in anticipation of regulatory demands for its disposal in connection with its efforts to purchase Monsanto. They represent the areas of most obvious excessive concentration on which competition authorities would focus, and Bayer did not want to be put in the position that duPont (NYSE:DWDP) was placed, scrambling to make disposals in order to win regulatory approval for its merger with Dow.
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BASF buys Bayer's crop science assets at a fair price
John Abbink
Seeking Alpha, 14 Oct 2017
https://seekingalpha.com/article/4113482-basf-buys-bayers-crop-science-assets-fair-price?auth_param=1d81p8:1cu36fu:baba283484e580061dac1c4d7641aabd&uprof=52&dr=1
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Summary
* In connection with its proposed acquisition of Monsanto, Bayer put significant crop science assets out for auction in order to smooth regulatory approvals.
* BASF has negotiated to buy them for €5.9 billion. Commentators are split on this valuation, although the balance of opinion seems to be that this is a steep price.
* Examining it carefully, this does not seem to be the case: BASF is not getting a raging bargain, but it is paying a fair price.
* Arbitrageurs closed Monsanto’s discount to Bayer’s bid noticeably in reaction to the news.
Bayer (OTCPK:BAYRY) has announced the sale of parts of its Crop Sciences business to BASF (OTCQX:BASFY) for €5.9 billion. They include its Liberty®, Basta® and Finale® pesticides and related traits business as well as most of Bayer’s activities in cottonseed, rapeseed, canola and soybean seeds. Bayer is retaining some portions of the latter - for instance, it will not sell the Indian portion of its cottonseed business, because Monsanto (NYSE:MON), which it is in the process of acquiring, is selling much of its Indian cottonseed presence. BASF reports that these assets produced revenue of €1.3 billion and EBITDA of €385 million in 2016. They amount to the bulk of the assets Bayer put up for auction in March.
The transaction is contingent on Bayer closing its acquisition of Monsanto and regulatory approval (which should not be a major problem). This purchase is the largest BASF has ever made, and naturally raises the question whether it is getting a good deal. Quite a few commentators are skeptical (see here and here). But the question has a deeper interest than simply which company got the better end of the bargain, because while Bayer is more or less a forced seller, BASF is pretty much a forced buyer.
Bayer put these assets up for sale in anticipation of regulatory demands for its disposal in connection with its efforts to purchase Monsanto. They represent the areas of most obvious excessive concentration on which competition authorities would focus, and Bayer did not want to be put in the position that duPont (NYSE:DWDP) was placed, scrambling to make disposals in order to win regulatory approval for its merger with Dow.
BASF has failed to break successfully into molecular biology. This is a serious problem for the world’s fourth largest agrochemicals business, because the sector’s future is in gene-tailoring crop plants to tolerate the products these companies produce. The rise in pesticide resistance makes the research in the alternative direction - finding effective pesticide molecules that unaltered crop plants will tolerate - increasingly difficult. Although BASF has produced interesting innovations, it has not been able to build a seeds and traits business appropriate to its scale and global, multi-crop agrochemicals activities. BASF needed this acquisition as badly as Bayer needed the sale.
BASF almost certainly had competition for this purchase, and given its need to buy these assets, this could well have tempted it to overpay. ChemChina was widely believed to be interested, especially in the cotton assets, but so soon after its $46 billion Syngenta purchase, and in the face of likely anti-trust issues, it may have been less aggressive in pursuit of these assets than it might otherwise have been. It may be that Bayer insisted on selling the assets as package rather than piecemeal, which may also have discouraged ChemChina. Few other potential buyers would have had as much incentive to bid as these two companies.
BASF is paying 15.3X last year’s EBITDA for these assets. Given that BASF is trading at 7.8X its 2016 EBITA, this looks pretty steep, and indeed it would be if BASF were financing this purchase with equity. But BASF consists largely of commodity chemical businesses with comparatively low margins that do not attract strong valuations: its consolidated 2016 EBITDA margin was 18.3%. However, agrochemicals have far higher margins than BASF’s average: in 2016, BASF’s crop sciences business had an EBITDA margin of 23.4%. This compares with the 29.6% EBITDA margin earned by the Bayer assets it is buying. Given this background, it does not seem as though BASF is overpaying.
The second of the Bloomberg articles cited above claims that the average EBITDA multiple for agrochemical deals in the last three years is 10.6X. This is largely irrelevant. The only deals that are remotely comparable to this one are ChemChina’s purchase of Syngenta and Bayer's offer for Monsanto. Comparisons with transactions in fertilizers and commodity pesticides are essentially irrelevant. Syngenta was purchased at 17.0X 2016 EBITDA and Bayer has offered 21.1X EBITDA for Monsanto. Granted, both are much larger and more attractive assets than what BASF is buying. And the Syngenta purchase finally closed not so long after 2016 as BASF’s purchase, the valuation it will pay on the Bayer assets, based on more current earnings, will be lower than 15.3X. The skepticism I have expressed elsewhere about when the Bayer/Monsanto deal will close, if justified, will only mean that the purchase multiple is further removed from 2016 and thus lower.
Paying a good price for a unique asset is to be expected: there are no other seeds/traits businesses of any importance left to buy. BASF has not taken as much advantage of Bayer’s need to sell these assets as it might otherwise have, but it has not done badly. I believe that it is paying an attractive to fair price….