Bayer's bid for Monsanto is complementary

Any merger of the two global players will lead to a larger entity, both in India and abroad, with presence across agrochemical, pesticide and seeds segments

The agriculture commodities space has come under the spotlight with increased pace of mergers and acquisitions as also with continuous flow of news on the regulatory front, both globally and in India.

The latest move is by Bayer AG, the German drugs and crop chemicals group. Bayer has offered $62 billion for acquiring US seeds company Monsanto. This is the largest bid by a German company for acquisition as Bayer wants to become a global leader in agriculture space. While the move will help Bayer secure a top position in the global industry that is already seeing consolidation, it will have visible implications in India, too.

For Bayer, eyeing Monsanto is logical, looking at the huge seeds portfolio it offers, something that will complement Bayer's large agrochemical and pesticide portfolio. In India, the combined entity namely, Bayer Crop Sciences, Monsanto India and Mahyco Monsanto (from the agri space) will also emerge large with complementary businesses. Their combined revenue and net profit based on FY15 results would stand at Rs 5,044 crore and Rs 888 crore, respectively. In FY16, while Bayer has clocked in Rs 3,743 crore in revenues, the full-year results of the Monsanto India and Mahyco Monsanto are still awaited. A merger between the three would take the merged entity closer to UPL, which reported Rs 13,083 crore revenue in FY16. However, almost 80 per cent of UPL's revenue came from global operations, according to a report by Emkay Global released last month.

Looking at the financials of the two listed companies, the performance of Bayer CropScience has seen more stable and growth has been consistent in the past five to six years, which is a bit uneven and slow in the case of Monsanto India. So, if the two listed companies are merged, Monsanto India shareholders could hope for more stable growth. Though their margin profile is different, with Monsanto India's being higher, the companies earn high return on capital employed of 29-34 per cent (based on FY15 figures) and are debt-free.

The combined market capitalisation would work out to almost Rs 19,000 crore, given Bayer's Rs 15,388 crore and Monsanto India's Rs 3,586 crore. Interestingly, their parents hold 68.58 per cent and 72.14 per cent, respectively, in the listed companies. So, it might not alter the free-float and non-promoter holding significantly.

With the bid by Bayer AG at $122, Monsanto stock prices on Dow Jones are close to $101, up from $90 before the talks erupted. However, on the BSE, Monsanto India saw its share prices fall by a steep 8.58 per cent to Rs 2,077.50 on Monday. This is on the back of the government's move (last weekend) that tightened rules for the sale of genetically-modified cotton seeds in country. The government is capping royalties for any new variety of seeds to 10 per cent. Since the domestic market's sole supplier is Monsanto, the decision has hurt the Street's sentiment. The government had in March 2016 cut the royalties that Indian companies paid to Monsanto for existing range of cotton-seed pricing. This was done through a big cut in Bt tech fee - the price of cotton seed was lowered to Rs 800 a packet from Rs 830-1,100 earlier.

The decision has been debated, but analysts say, looking at the huge sales volumes the multinational companies (MNCs) cannot ignore the Indian market and will still earn significantly. Further, the government is looking at farmers' interest and is targeting to boost agriculture income, too. However, these measures could have resulted in some delay in the introduction of some innovative products and technologies into the country, by MNCs.

Meanwhile, the completion of the acquisition of Monstano by Bayer AG will be a long drawn process as Monsanto is to agree to the offer. Analysts also expect stiff negotiations to follow and say there are challenges with respect to getting requisite approvals, regulatory compliance, etc, for the merger between the two multi-billion giants which will create an entity with a much bigger value.

The international arena is already seeing a lot of consolidation Syngenta ended up accepting a $43 billion offer from ChemChina (China National Chemical corporation) in February, while in end-December 2015 Dow Chemical Company and DuPont, too, agreed for a deal. While the mergers are taking place to create larger formidable entities with strong pipeline of products and drawing synergistic benefits, too, the drop in commodity prices has also put pressure on companies; even farmers' cutting orders for supplies is posing as a challenge.

Though the drivers for international consolidation might be different, India, too, is seeing many attempts. Japan-based Sumitomo Corporation is believed to be in advanced stages to acquire equity stake in Excel Crop Care. To get a foothold in India, the international majors are looking at inorganic opportunities as well, because growing organically will not be easy. The challenges for building brands and developing a distribution network are immense, says Preet Mohan Singh, executive director and Koushik Bhattacharyya at Avendus Capital.