Wednesday, 19 December 2018

Bayer reaps what it sows

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  • Bayer reaps what it sows
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Acquisition of Monsanto offers an innovative funder even more scope to get creative.

German life sciences company Bayer has been one of the most creative European bond issuers during the past few years and issued Europe’s biggest ever mandatory convertible bond for €4bn in November 2016.

Bayer clinched a US$66bn all-cash takeover of US seeds company Monsanto in September of that year. The merger aims to create a one-stop shop for seeds, crop chemicals and computer-aided services to farmers, with the deal now awaiting approved from anti-trust authorities in the United States, Europe and South Africa. The company expects it to be completed by the end of this year and plans to finance 75% of the acquisition with debt and 25% through equity, primarily through a rights issue.

The deal will be the largest ever involving a German buyer, surpassing Daimler’s tie-up with Chrysler in 1998, which valued the US carmaker at more than US$40bn.

In October, Bayer closed a US$57bn three-year bridge loan to support the acquisition, which it has not yet drawn down and does not expect to have to use completely. It was backed by 27 lenders, including European and Japanese banks. The company also took out a US$10bn term loan of up to five years.

Ultimately, it plans to pay for its US rival by raising US$19bn in equity through a rights issue and convertible bonds, and the remainder by issuing debt.

November’s €4bn mandatory convertible bond - a hybrid instrument that pays a fixed coupon and transforms into shares at a future date - is one of the main components of the equity side of the financing structure. It is the largest equity-linked trade in EMEA since KfW’s €5bn exchangeable into Deutsche Telekom from 2003.

Bayer is paying a coupon of 5.62% to institutional investors and the bond will automatically convert into equity on November 22 2019 at between €90 and €108 per share.

“I am pleased that we have the placement of this complex instrument behind us,” said Peter Mueller, Bayer’s head of finance. “The Monsanto acquisition is denominated in US dollars. Early issuance of the bond was useful because we converted the euro proceeds into US dollars and thus reduced our remaining euro/dollar foreign exchange risk. The dollar cash now forms a natural hedge for us.

“The bridge loan is available for up to three years, so there is no hurry for us to rush to the capital markets.”

The hedging aspect of the convertible bond is important, as Bayer is raising most of the financing for the deal in Europe. The main currency risk arises from a weakening of the euro against the US dollar.

Playing by the rules

Under German rules, the bond issue was possible as part of conditional capital, which allows for a 10% capital increase (or a maximum €6bn nominal rise). It meant that Bayer was able to issue it without the application of subscription rights for existing shareholders and to qualified institutional investors only. In this way, the company was able to avoid the time-consuming preparation of a public prospectus and a rights trading period.

It left what is known as ‘authorised capital’ completely untouched, and this provides Bayer with an additional option for equity financing later on (a capital increase of up to 35% could take place but with subscription rights applied).

It will pay €225m in interest for the convertible bond per year. Its net debt is expected to rise to a relatively high four times earnings before interest, tax, depreciation and amortisation after the deal, but Bayer is determined to retain its investment-grade credit ratings.

It is also planning a mega US$15bn rights issue in the fourth quarter this year, once regulatory approval for the Monsanto acquisition has been received. Most of the company’s shareholder base comes from the UK and the US.

It does not plan any further debt issuance this year but expects to issue around US$28bn in bonds in US and European markets next year. Most of the issuance will be US dollar denominated.

Covestro divestment

In March, Bayer sold an 11% stake in Covestro, its chemicals subsidiary, for €1.46bn, with the proceeds to be used partly to finance the Monsanto deal. It leaves the German company with a 53.3% stake in the business and it plans to divest the remainder of its Covestro shares during the next few years.

Currently, Bayer enjoys an issuer default rating of A from Fitch. The agency says that it could be downgraded by up to two notches once the Monsanto deal is completed.

“Following the acquisition, Bayer will have a higher levered balance sheet,” said Frank Orthbandt, director in the corporate consumer and healthcare team at Fitch Ratings.

“The current historically low bond yields are creating an incentive for big corporates to undertake debt-funded acquisitions, locking in those low yields. But this in some instances can negatively affect their credit ratings. Recently, we have seen similar transactions in the consumer and pharmaceutical sectors.”

Standard & Poor’s rates Bayer A- but placed it on negative watch following the approach to Monsanto.

“Bayer would be taking on more debt following the acquisition,” said Maxime Puget, a senior credit analyst in corporate ratings at S&P.

“That creates more risk, so it is obviously credit negative. Furthermore, cash flow can be volatile in agrichemicals businesses. However, the acquisition’s geographic complementarity is high. That is one of the mergers’ advantages.”


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