A farmer drives a Claas KGaA Axion 820 tractor, fitted with John Deere & Co. Greenstar 2630, Amazonen-Werke H Dreyer GmbH GPS Switch and Amatron terminals, through a field of wheat at Thrales End Farm near Harpenden, U.K., on Monday June 6, 2016. German chemical company Bayer AG cited the growth in such digitally assisted farming as a key reason for its $62 billion bid for Monsanto Co., which has become a leading provider of analytics used by growers. Photographer: Luke MacGregor/Bloomberg
© Bloomberg

Bayer is bracing itself for tough regulatory scrutiny of its $66bn deal to acquire Monsanto, which will transform the German aspirin-to-chemicals conglomerate into the world’s biggest supplier of seeds and crop sprays to farmers.

The all-cash transaction announced on Wednesday ends four months of negotiations between the two companies, after Bayer raised an opening bid of $122 for each Monsanto share in May at least three times to clinch the takeover at $128.

Hugh Grant, Monsanto chief executive, stands to collect more than $135m* following the sale, according to the US company’s latest annual report, with a large amount of that sum coming from the vesting of shares and options the long-serving manager holds, as well as a severance package if he leaves as a result of the deal.

But the transaction comes with regulators already trying to digest the tie-up agreed last year between Dow Chemical and DuPont, and ChemChina’s acquisition of Switzerland’s Syngenta this year. The three megadeals would reduce the number of global players in the agribusiness sector from six to four.

Consolidation has been driven by a global grain glut that has pushed down crop prices and hurt farm incomes, leading to reduced investment in agricultural inputs such as fertilisers and sprays.

But some farmers’ groups worry that the deals will reduce competition and innovation and ultimately lead to higher prices for seeds and chemicals.

The Bayer-Monsanto transaction includes a $2bn break-fee payable by the German company to its US rival should it walk away from the agreement, or if the deal gets blocked by regulators, underscoring the significant risk the takeover faces from competition authorities.

Werner Baumann, Bayer chief executive, said the companies would need to file in about 30 jurisdictions for the deal, and acknowledged that it would need the approval of regulators in the US, Canada, Brazil and the EU.

Bayer’s proposed acquisition of Monsanto values the target at $66bn including debt. Monsanto’s equity value is about $57bn.

The transaction ranks as the largest all-cash deal ever attempted and biggest overseas acquisition of a US company.

Bayer and Monsanto are anticipating cost savings worth $1.5bn within three years of the deal. The German company will pay for its US rival by raising $19bn in equity through a rights issue and convertible bonds, and the remainder by issuing debt.

Bayer is securing $57bn in bridge financing from Bank of America, Credit Suisse, Goldman Sachs, HSBC and JPMorgan.

Bayer’s net debt is expected to rise to a relatively high four times earnings before interest, tax, depreciation and amortisation after the deal, but the German company stressed it would seek to retain its investment-grade credit rating.

The takeover of Monsanto, which is the leading developer of genetically modified seeds and a company consistently identified as one of the most hated corporations globally, is expected to attract intense political interest.

Europe has traditionally been opposed to the adoption and consumption of GM crops, and the EU has strict rules on the import and export of genetically engineered foods.

But both Bayer and Monsanto played down the antitrust risks associated with the deal, arguing that the two companies had little regional or customer overlap.

Mr Baumann said any regulatory hurdles for the takeover of Monsanto should be “manageable”. Mr Grant added: “There is very little overlap between the companies.”

However, there is a big risk that European regulators could veto the deal. “Considering how the EU is seen right now, Brussels will be under pressure to show itself as a champion of consumer rights,” said one person close to the deal.

Scrutiny is expected to be intense in the US. Chuck Grassley, chairman of the Senate judiciary committee, has called a hearing for later this month on all the megadeals. “Iowa farmers who I’ve spoken with are worried about rising input costs, especially in an increasingly weak agriculture economy,” he said.

Jeremy Redenius, analyst at Bernstein, said there was only a 50 per cent probability that the Bayer-Monsanto deal would complete. “We expect significant antitrust and political hurdles,” he said.

In New York on Wednesday, Monsanto’s shares were trading at a substantial discount to Bayer’s offer price, implying investors are sceptical the deal will go through. The stock was up 0.9 per cent at $107.01. Bayer’s shares closed up 0.3 per cent at €93.55 in Frankfurt.

Asked about Mr Grant’s future, Mr Baumann said no personnel decisions had been taken.

Additional reporting by David Lynch in Washington

* An earlier version of this story said Mr Grant could make more than $226m from the deal. This did not take into account the sum he would have to pay to exercise his share options.

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