Bayer in talks with banks to finance Monsanto offer

Monsanto rejected $62 billion bid, which sends Bayer to the bank. They'll likely need to raise $40 billion.

by Aaron Kirchfeld, Angela Cullen and Luca Casiraghi

Bayer AG is close to choosing banks to arrange funds for its proposed acquisition of Monsanto Co., according to people familiar with the matter, after the U.S. company rejected the initial $62 billion bid as too low and sought reassurances on the potential financing.

Related: Bayer bids $62 million for Monsanto

Bayer will probably raise more than $40 billion in short-term bridge financing and most of the remainder in term loans, said the people, who asked not to be identified because the talks are private. The German company interviewed lenders at its headquarters in Leverkusen this week and is likely to select about half a dozen banks next week, the people said.

Funding negotiations are ongoing and the amounts could change, the people said. Banks are likely to offer additional financing to give Bayer room to increase its offer if needed, said the people. A spokesman for Bayer declined to comment.

Providing the terms of the funding may help allay Monsanto’s concerns about the financing and let talks advance on Bayer’s bid to become the world’s biggest supplier of farm chemicals and seeds. Monsanto said that while the original offer was inadequate, it’s open to further negotiations. Bayer remains confident about reaching an agreement on the deal, which would be the largest this year and biggest ever by a German company.

Related: Monsanto rejects Bayer’s $62 billion bid

Bridge loans

Bayer is considering selling convertible debt for $2 billion to $3 billion, two of the people said. Banks are offering $40 billion to $50 billion in bridge loans, the people said. These are short-term funds provided by lenders in an acquisition while the buyer arranges longer-term funding such as term loans and bonds. The term loans could total more than $20 billion, one of the people said.

Bank of America Corp. and Credit Suisse Group AG are Bayer’s main advisers and financiers. Rothschild is also advising Bayer.

Shares of Bayer slumped 0.3% to 85.45 euros in Frankfurt on Friday. The stock has dropped about 14% since May 11, the day before Bloomberg News reported that Bayer was exploring a possible bid. Monsanto, which has climbed 22% in the same period, rose 0.2% to $109.84 in New York.

Relying on debt

In unveiling its May 10 offer of $122 a share in cash, Bayer said the transaction would be funded with a combination of debt and equity, with about a quarter of the $62 billion in enterprise value coming from selling shares to existing investors. Bayer may also sell new hybrid bonds “to a very limited extent,” while relying largely on senior debt, Chief Financial Officer Johannes M. Dietsch told analysts on Monday.

Bayer will probably make a higher bid, Jonas Oxgaard, an analyst with Sanford C. Bernstein & Co. in New York, said Tuesday in a note, adding that an offer below $135 per share would be “challenging” for Monsanto to agree to. The offered price is unlikely to go beyond $140 a share, according to Jeffrey Holford, an analyst at Jefferies LLC.

Moody’s Investors Service on Tuesday placed Bayer’s A3 credit rating under review for a downgrade because of the Monsanto offer. Fitch Ratings also said it may cut the rating by from A to BBB, the lowest investment-grade level.

Clashes, disputes

Monsanto is the largest seed supplier and a pioneer of genetically modified crops, which in the two decades since their introduction have come to account for the majority of corn and soybeans grown in the U.S. The company has become vulnerable to a takeover as a number of problems piled up this year: Monsanto has cut its earnings forecast, clashed with some of the world’s largest commodity-trading companies and become locked in disputes with the governments of Argentina and India.

Bayer, a 152-year-old company, was founded by two friends who made dyes from coal-tar derivatives. Over the following decades, they expanded into other chemicals and pharmaceuticals, introducing heroin as a cough remedy in 1896 and then aspirin, the world’s first blockbuster drug, in 1899.

Now the company is seizing the opportunity to expand its crops-science business. It’s original all-cash offer, which was publicly disclosed on Monday, represented a 37% premium on Monsanto shares from their May 9 level, and valued the equity capital at $53 billion.

Related: Bayer confident it can make a deal with Monsanto

--With assistance from Johannes Koch, Dinesh Nair and Ruth David.

To contact the reporters on this story: Aaron Kirchfeld in London at [email protected]; Angela Cullen in Frankfurt at [email protected]; Luca Casiraghi in London at [email protected]

To contact the editors responsible for this story: Aaron Kirchfeld at [email protected]

Chitra Somayaji

© 2016 Bloomberg L.P

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