By Chris Clayton
DTN Ag Policy Editor
OMAHA (DTN) -- Moody's Investors Service says Bayer AG's takeover of Monsanto "makes strategic sense," but will put some leverage pressure on Bayer in the short term and could affect Bayer's reputation because of Monsanto's battles in Europe over biotechnology.
Moody's issued a report this week analyzing the Bayer-Monsanto merger, which is just starting to undergo regulatory approval in both the U.S. and Europe. Overall, Moody's states the merger fits Bayer AG's profile, though the acquisition of Monsanto would lead to Bayer facing "a sharp rise in its leverage," Moody's stated.
"The $66 billion acquisition is underpinned by a sound strategic rationale but creating the world's largest player in the agricultural chemical and seeds sector nonetheless poses significant execution and reputational risks," stated Francois Lauras, a vice president and senior credit officer at Moody's.
The ratings agency indicated the merger would create some issues because of size. Further, regulators could require the companies to sell some agricultural lines. Specifically, Moody's stated regulators could require the companies to sell or reduce their combined market shares in cotton or canola seed, or possibly glyphosate sales, but "these overlaps are not material to the combined businesses," the ratings agency stated.
Moody's looked at various possible outcomes in the merger and stated it could lead to a possible downgrade of Bayer AG stock, but by "no more than two notches." Moody's noted the report does not constitute an actual ratings action by the agency. Right now, Moody's gives Bayer AG a long-term A3 rating. A two-notch drop would still keep Bayer AG in under Moody's "prime" stock ranking, based on Moody's chart. That is actually an improvement from last May when Moody's suggested a possible larger stock downgrade for the Bayer-Monsanto combination.
Regarding the Moody's report, Darren Wallis, a spokesman for Bayer AG, responded to DTN that the companies recognize that "with any business combination of this scale, we understand antitrust authorities might examine the transaction closely. We have committed to undertake a certain level of divestitures if required by regulatory authorities."
The combined Bayer-Monsanto company would be the world's largest agricultural chemical-and-seed company, based on sales at $23.1 billion -- topping the ChemChina purchase of Syngenta at an estimated $14.8 billion in sales, and the Dow-DuPont merger at $14.6 billion in combined seed and chemical sales.
While some farm groups and antitrust groups have expressed concern about the impact on farmers, Moody's stated the combined company would be "in a good position to make a strong integrated offer to farmers."
Moody's stated the "transaction, which is expected to close by the end of 2017, supports Bayer's overall business profile, which will be equally balanced between health care and crop science activities." Further, the deal makes sense because agriculture has been hurt by low commodity prices caused by bumper crops in major export countries such as the U.S. and Brazil, Moody's stated.
The merger would also likely create $1.2 billion in "cost synergies" between the two companies as well as a $300 million boost in "sales synergies," the ratings firm stated.
Moody's also noted that Bayer AG would have to deal with "significant cultural differences" between the two companies regarding governance, business execution and philosophy. Moody's cited Monsanto's "much adverse publicity" over its leading role in the development of biotechnology. The topic has been more controversial in Europe, and Bayer AG is based in Germany. Further, Monsanto has had problems getting the European Commission to renew its registration of glyphosate in Europe as regulators wait on the European Chemical Agency to finish its classification of glyphosate, which includes dealing with the issue of whether glyphosate is carcinogenic. Moody's did not note that Monsanto is dealing with similar issues regarding glyphosate in the U.S., as well as growing litigation surrounding the product.
Related to the Bayer-Monsanto deal, Sen. Charles Grassley, R-Iowa, sent a letter Tuesday to the Department of Justice encouraging the Antitrust Division to "conduct a robust analysis" of the merger.
Grassley stated he was concerned the merger would "lessen competition in an already highly concentrated sector of our economy." The result would be less choice for farmers and higher input prices, he stated.
"I am concerned that the proposed Bayer-Monsanto transaction will detrimentally impact agricultural input markets for seeds and chemicals," the senator wrote to DOJ.
Chris Clayton can be reached at Chris.Clayton@dtn.com
Follow him on Twitter @ChrisClaytonDTN
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