Bayer may set sights on big acquisition even as deal options dwindle
December 19 2015 08:34 PM

The logo of Bayer is seen at the Bayer Healthcare subgroup production plant in Wuppertal. Bayer is likely to seek a major life sciences M&A deal in the next few years, according to banking sources, as its absence from a recent wave of consolidation could undermine its position in markets such as crop protection and animal health.


Bayer is likely to seek a major life sciences M&A deal in the next few years, according to banking sources, as its absence from a recent wave of consolidation could undermine its position in markets such as crop protection and animal health.
Possible targets for the German company could include veterinary drug firm Zoetis and Pfizer’s consumer health business, the two sources said.
Bayer, Zoetis and Pfizer declined to comment.
Bayer, which makes drugs, seeds and pesticides, has watched from the sidelines as a string of its rivals in different life sciences markets have struck deals to bolster their positions.
The planned combination of DuPont and Dow Chemical’s agriculture businesses creates a more formidable rival for Bayer in both pesticides and seeds, while also eliminating two potential merger partners in those sectors.
In animal health, meanwhile, Bayer is set to become a second-tier player behind four clear market leaders following a series of major consolidation moves in the sector, capped by the exclusive talks this month between Sanofi and Boehringer Ingelheim to combine some businesses.
Bayer has been hobbled by its refusal to relinquish any of its life science businesses, which has kept it out of asset swaps such as the $20bn Sanofi-Boehringer plan and last year’s three-way trade involving Novartis, GlaxoSmithKline and Eli Lilly.
In the pesticides markets it is held back by antitrust obstacles, as a close second in global rankings to Syngenta. That could also keep the coveted seeds businesses of their rivals out of reach, as they are typically combined with crop chemicals.
Syngenta and Bayer each command about a fifth of the global pesticides market, with Bayer leading the insecticides segment with a 23% share.
But Bayer’s strategy chief and CEO-in-waiting Werner Baumann is content to bide his time for now, investment bankers say.
The company is in no rush to overhaul its agriculture business - seeds and pesticides - which is already among the most profitable in the sector with nine-month core earnings margins at more than 26%, above BASF, Syngenta and Dow’s.
The German group also has to digest last year’s $14bn purchase of Merck & Co’s consumer health products, which saw it outbid rivals such as Reckitt Benckiser. But the recent M&A hiatus will only whet Baumann’s appetite for deals over the next few years, the banking sources said. US-based Zoetis, which has a market value of $23bn, or any consumer health assets that might be jettisoned by Pfizer, will be on his radar, they added.
“Werner Baumann is being underestimated. He won’t hesitate to do a deal if it fits. He and (finance chief Johannes) Dietsch were the driving force behind the Merck deal,” one banker said, asking not to be named as they are not authorised to speak publicly.
Pfizer, which is in the process of buying Allergan, has a history of aggressively restructuring its portfolio, with large takeovers often followed by divestments or spin-offs to focus on core businesses. For instance, it split off its Zoetis animal health unit in 2013. Analysts at brokerages including Bernstein Research and Exane BNP Paribas have said they do not expect the US drugmaker to hold on to its consumer health business for long, though Pfizer has not made any official statements regarding a separation of that business.
For Bayer, any such M&A moves might mean it will have to borrow heavily at the expense of its single-A credit rating or even hold a cash call, unless its changes tack and offers any of its businesses in a barter trade, the sources said.
Since splitting off its plastics business Covestro in October, the German firm has repeatedly said it will develop its plant, animal and human health businesses under one roof.
Sources familiar with the company said management continued to regard its animal health and crop protection operations as essential parts of the group
Baumann, who is expected to take the helm of the company in early 2017, told Reuters earlier this year that Bayer did not need a merger to make it more successful and that Bayer’s responsibility went beyond its shareholders.
But some investment bankers expect a boardroom rethink following the wave of industry deals, and say Bayer’s crop protection and seeds division could be spun-off or combined with a rival’s business.

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