BAYRY Bayer Aktiengesellschaft (PK)

By Christopher Alessi and Jacob Bunge 

Executives presented Bayer AG's deal to buy Monsanto Co. as a win for both companies, but shareholders in the two camps weren't ready to declare victory at the $57 billion price tag.

Bayer shareholders appeared cautiously optimistic after worrying that the German drugs and chemicals giant could overpay, while some Monsanto shareholders said they had envisioned a higher price for the world's largest developer of high-tech crop seeds, though they acknowledged a deep trough facing the agriculture sector.

"No one's exactly thrilled, which probably means it ended up in a good compromise situation," said Andy Murray, portfolio manager at Becker Capital Management, a Portland, Ore. firm that owns Monsanto shares.

Bayer, which had been pursuing Monsanto for four months, Wednesday struck a deal to acquire the U.S. firm at $128 a share in cash. If successful, it will rank as Bayer's largest-ever acquisition, joining its broad range of pesticide products with Monsanto's industry-leading capabilities in seeds and biotechnology to create the world's largest supplier of farm inputs.

The price was welcomed by initially skeptical Bayer investors, some of whom had predicted Bayer would need to raise its bid to between $130 and $135 a share to satisfy Monsanto's board. After unveiling the initial bid for Monsanto in May, Bayer officials including Chief Executive Werner Baumann hit the road for several weeks to meet with shareholders and explain what many investors regarded as an abrupt shift in strategy, potentially at a steep cost.

"I was surprised that the price was cheaper than I thought," said Markus Manns, fund manager at Bayer shareholder Union Investment. Monsanto's bargaining position may have been weakened due to the continued slump in the farm economy, he said. Futures prices for corn -- Monsanto's biggest product line -- hit a seven-year low in late August as a record U.S. harvest looms.

Some Monsanto shareholders, however, said that shorter-term challenges shouldn't diminish the value of the world's largest biotech seed developer, where advances in technology can take longer than a decade to bring to market, spanning any number of ups and downs in commodity markets. A survey by Sanford C. Bernstein analysts conducted prior to the deal's announcement showed that the largest number of respondents anticipated a price between $129 and $130 a share.

"The strategic sense of [the deal] is right," said Kelly Wiesbrock, managing director at Harvest Capital Strategies LLC, a San Francisco-based investment firm that owns Monsanto shares. "The price is a little disappointing."

Mr. Baumann told analysts on a conference call Wednesday that the deal would allow Bayer to deliver value to its shareholders from an upswing in agricultural markets and longer-term growth in the global population. Hugh Grant, Monsanto's CEO and chairman, said Bayer represented a good strategic fit, and Monsanto's board approved the deal after exploring alternative paths, including staying independent.

Bayer's shares fell 2.3% to settle at EUR91.37 Thursday, while Monsanto's stock fell 2.4% to $104.22. Investors said the prices reflected some disappointment on the deal price as well as uncertainty due to the lengthy regulatory gauntlet facing the deal, with approval required by dozens of regulators around the world. The companies expect the transaction to close by the end of next year.

The lower-than-expected price, combined with the current lending environment, should allow Bayer to relatively quickly reduce its debt, having already swelled from a string of acquisitions, investors said. Bayer's net debt stood at EUR17.45 billion (about $20 billion) in 2015, more than double the EUR7 billion it held in 2011.

Jim Nelson, a portfolio manager and Bayer investor Euro Pacific Capital Inc. in New York, said the deal should benefit Bayer since it is funded primarily with money borrowed at very low rates. "The combined company would control 30% of the overall seeds market, resulting in increased pricing power," he added.

Purchasing Monsanto may leave Bayer little flexibility to pursue other acquisitions. To generate cash, it may need to divest its majority stake in Covestro AG, a specialty-plastics business that Bayer spun off last year, and its animal-health unit, some analysts said.

Securing the deal would make agriculture roughly half of overall group sales, compared with 30% in 2015. The health-care business would then comprise roughly the other half of sales.

Some Bayer investors remain uncomfortable with the shift. Greg Herbert, a fund manager at U.K.-based Jupiter Fund Management PLC, said last week that after buying Monsanto, Bayer would "be left with a highly geared balance sheet and the management effort to integrate the two businesses could easily lead to the larger pharmaceutical business being neglected." Mr. Herbert said Thursday he had no further comment on the deal.

David Moss, head of European Equities for F&C Management Ltd., which owns Bayer shares, said he sees long-term growth ahead for agricultural companies as the global population expands and grows more wealthy. "This will be the biggest play on that and it's a cheap stock at the moment," he said. "The fear was, they might pay an awful lot more."

Write to Christopher Alessi at christopher.alessi@wsj.com and Jacob Bunge at jacob.bunge@wsj.com

(END) Dow Jones Newswires

September 15, 2016 19:09 ET (23:09 GMT)

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