Big, not beautiful

Bayer's Monsanto bid flags conglomerate curse

Bayer's offer for Monsanto could be a triumph for a very unfashionable corporate beast: the conglomerate. Bayer boss Werner Baumann can only muster the $62 billion he needs to buy the US seed maker because his own crop science business is backed by a large and successful health care arm, which makes up 63 per cent of Bayer's EBITDA. Baumann may see this as a benefit of being diversified. For shareholders it could turn out to be the opposite.

Monsanto shareholders are being offered almost $15 billion more for their equity than its market value on May 9, the day before Bayer privately made its approach. Since $47 billion of the total value of the deal will be funded in debt, it will leave the merged group with borrowings of four times its combined EBITDA.

But in reality, much of that debt is being loaded onto Bayer's health care business. If the crop science unit were buying Monsanto unaided, it would end up with net borrowings that were more than seven times combined EBITDA, which looks too high for comfort. The risk is that Bayer's options for making acquisitions in health care will be stunted. Buying Monsanto could benefit one side of the business at the expense of the other.

The biggest concern for shareholders may simply be that the deal looks like it will destroy value. Bayer expects $1.5 billion of annual synergies. According to a Breakingviews estimate, this represents a net present value of around $11 billion compared to that $15 billion premium. And Bayer hasn't said how much is supposed to come from enhanced revenue, which is typically hard to achieve in real life.

As a stand-alone company, Bayer's crop science unit would be prey rather than predator. Monsanto's EBITDA is roughly 40 per cent bigger than the division that is acquiring it - and the US group even expressed an interest in buying Bayer's agrichemical business earlier this year. The German giant has taken steps to reduce its sprawl, spinning out specialty chemicals and plastics, and the remainder of its business is well run. From the perspective of Bayer's shareholders, selling the crops business for a premium might have been a much quicker and less risky way of creating value.