Bayer’s $62bn Monsanto bid: Are European firms about to take over the world?
Just when you thought the dearth of outbound M&A in Europe was here to stay, Germany’s Bayer sweeps in with a $62bn bid for US agrichemicals giant Monsanto.
Not only would the tie-up create the world’s largest agricultural supplier, more significantly for Europe, it would be the biggest outbound takeover by a German corporate on record. It could also mark the start of a flurry of deal-making across the continent.
With just one week to go before the European Central Bank’s new easing measures kick in, strategists have been waiting on tenterhooks for the M&A spigots to turn on. Bank of America Merrill Lynch’s Barnaby Martin told CNBC last week that a surge in corporate re-leveraging will see more M&A as the most obvious outcome.
In fact, he’s so bullish on the appetite for acquisitions that he’s predicting an age in which the ECB lays the groundwork for “European firms to take over the world.”
However, not everyone is cheering renewed interest in overseas targets. One Bayer shareholder is slamming its new approach, calling it “arrogant empire building,” according to Reuters.
Elsewhere, the bid has been met with caution by some investors. This is evidenced by a near 10 per cent dip in Bayer’s share price (before Monday’s open) since preliminary talks with Monsanto were confirmed.
Nonetheless, the chief executive of Bayer is rushing to put these doubts to rest, telling CNBC on Monday that he sees no obvious financing or regulatory risks with the all-cash transaction. The German company plans to fund the offer with a combination of debt and equity that will include a capital hike. But the jury is still out on whether the credit agencies will lend those terms a stamp of approval.
If the tie-up is approved, the business will be saddled with a net debt ratio of around four-times earnings. That might raise a few eyebrows when it comes to the company’s future firepower for strategic bolt-ons in other areas of the business.
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But it could also be seen as a positive correction in corporate willingness to re-leverage.
On balance, European firms remain extremely cautious relative to US peers, with debt-to-earnings ratios standing around three times, according to strategists at UBS Wealth Management. Julien Jarmoszko of S&P Global Market Intelligence told CNBC he is confident about Bayer’s ability to bring that ratio down to two times EBITDA (earnings before interest, taxes, depreciation and amortisation) in three to four years.
On that basis, “opportunistic” appears a more apt characterisation than “arrogant” when it comes to Bayer’s ambitions in a favourable credit environment.
At a time when an unhealthy preoccupation with the UK referendum on its EU membership and the declining influence of Europe continues to dominate the headlines, the region could benefit from corporate Germany flexing its muscles overseas. But it will take more than patriotic fervour to get investors and regulators on board.