WEBVTT - Perrella on Bayer Agreeing to Buy Monsanto (Audio) 0:00:01.320 --> 0:00:04.840 This is taking stock with Gadleys and grim Box on 0:00:04.920 --> 0:00:09.200 Bloomberg Radio. Is it really over? Is buyer really going 0:00:09.280 --> 0:00:13.360 to pay sixty six billion dollars for Monsanto? Let's find 0:00:13.400 --> 0:00:16.520 out more from Christopher Perella. He is US chemicals analyst 0:00:16.600 --> 0:00:20.639 for Bloomberg Intelligence. Christopher, thank you very much for being 0:00:20.760 --> 0:00:24.200 with us. Before we get to the details of the deal, 0:00:24.520 --> 0:00:28.880 tell me exactly your perspective from the chemical business point 0:00:28.880 --> 0:00:32.159 of view. Why would the deal get done at a 0:00:32.240 --> 0:00:36.040 time when crop prices are dropping? Doesn't that mean that 0:00:36.120 --> 0:00:39.960 farmers have less money to spend on the very products 0:00:40.000 --> 0:00:43.240 that buyer is looking to acquire. Oh, that's a good point, Pim, 0:00:43.240 --> 0:00:46.680 and I think the key here is to U to 0:00:46.960 --> 0:00:52.320 give farmers and all in bundle of seeds and crop chemicals. Uh, 0:00:52.640 --> 0:00:55.400 serve up an agronomic solution of farmers that you can 0:00:55.440 --> 0:00:59.000 package and sell out and drive sales growth that way, 0:00:59.040 --> 0:01:02.000 while the mark waits for crop prices to improve and 0:01:02.080 --> 0:01:07.199 thus the outlook for all these companies to improve. So uh, 0:01:07.240 --> 0:01:10.000 it's uh, well, just let's start with some of the 0:01:10.240 --> 0:01:13.039 nuts and bolts. The deal A good deal, I guess 0:01:13.080 --> 0:01:15.040 it's a good deal in the basics sense. It's going 0:01:15.080 --> 0:01:16.720 to get done. And there's been quite a bit of 0:01:16.720 --> 0:01:20.520 back and forth. Right, it does here that it's going 0:01:20.600 --> 0:01:23.400 to get done. Um. Some of the risks so behind 0:01:23.440 --> 0:01:26.200 the deal a lot of debt that has to go out. 0:01:26.319 --> 0:01:28.720 Buyer has to do some heavy lifting to finance this 0:01:29.360 --> 0:01:33.479 thirty nine billion in debt nineteen billion and mandatory convertible 0:01:33.520 --> 0:01:36.640 bonds and rights issues. Um. And if they can maintain 0:01:36.720 --> 0:01:38.679 investment grade rating, which is going to be a key 0:01:38.720 --> 0:01:41.200 to the deal, I think that helps them. Maybe uh 0:01:41.280 --> 0:01:44.480 with the ECB and their corporate bond purchase program that 0:01:44.560 --> 0:01:47.319 might that might also come into play as part of 0:01:47.319 --> 0:01:49.760 this deal as well. Well. Perhaps what they could do 0:01:49.880 --> 0:01:53.240 is they could actually sell the bonds directly to the 0:01:53.240 --> 0:01:57.480 European Central Bank. Right, quite quite possible with the disclaimer 0:01:57.520 --> 0:02:00.600 that I am not a credit anim us in Europe, 0:02:00.600 --> 0:02:03.400 but that that that does seem like a reasonable suggestion. 0:02:03.880 --> 0:02:05.480 All right, So now go into a little bit of 0:02:05.520 --> 0:02:08.960 detail in terms of the businesses that will be combined 0:02:09.200 --> 0:02:13.160 and what the future company might look like. Right. So 0:02:13.440 --> 0:02:16.920 from the egg perspective, which is the focus of this deal, 0:02:17.000 --> 0:02:21.160 you have Munsano, the leader in biotech seeds um and 0:02:21.240 --> 0:02:24.320 buyers number three in the crop chemical world, So you're 0:02:24.320 --> 0:02:27.960 combining seeds and sprays. But what it really does is 0:02:28.560 --> 0:02:31.280 that farmers care about it. In turn, regulators care about 0:02:31.400 --> 0:02:34.840 is it gives it. It's it's yield in the field 0:02:34.919 --> 0:02:38.920 for farmers. UM Whether you develop a biotech seed that 0:02:39.000 --> 0:02:41.800 helps the plant grow better or that fights off disease 0:02:41.880 --> 0:02:44.320 or pesticides, or if you develop a chemical that does 0:02:44.400 --> 0:02:48.480 something similar doesn't matter to the farmer. It's it's all 0:02:48.520 --> 0:02:52.160 about driving yields for the farmer, and regulators probably will 0:02:52.160 --> 0:02:54.720 look at it from from a similar perspective In terms 0:02:54.760 --> 0:02:58.320 of um. Seeds and crop chemicals really do compete against 0:02:58.360 --> 0:03:01.160 each other. It's just a different avenues to to get 0:03:01.200 --> 0:03:04.440 that yield. Uh, and higher yields higher income for the 0:03:04.480 --> 0:03:07.240 farmers out in the field. Now that being said, those 0:03:07.240 --> 0:03:11.760 two businesses put together, combined with buyers existing farm of business, 0:03:11.800 --> 0:03:14.480 it's it's basically the company is going to be half 0:03:14.480 --> 0:03:20.359 pharmaceuticals and half a can biotech seeds, which raises a 0:03:20.440 --> 0:03:23.480 number of questions about the long term viability of of 0:03:23.480 --> 0:03:28.800 of a model like that. So, uh, the big picture 0:03:28.960 --> 0:03:33.079 that some are framing is that this is something that 0:03:33.280 --> 0:03:38.080 is going to reshape the farming industry a whole new 0:03:38.120 --> 0:03:41.520 way of doing things. Uh, do you buy onto this 0:03:41.600 --> 0:03:43.480 or is that? Is it really going to be that 0:03:44.680 --> 0:03:48.680 much of a kind of landmark deal to make a 0:03:48.800 --> 0:03:52.120 new kind of approach here. Um, it's not a new 0:03:52.280 --> 0:03:55.160 kind of approach. It's the the ongoing evolution. So I 0:03:55.160 --> 0:03:58.440 wouldn't say that it's a a leap forward so much 0:03:58.480 --> 0:04:00.680 as it it's the way that the market seems to 0:04:00.680 --> 0:04:04.960 be heading. With Syngenta pioneering the model a few years 0:04:05.000 --> 0:04:07.920 back they started combining the seeds marketing, the seeds and 0:04:07.920 --> 0:04:11.960 the chemicals, UM Down and do Pont getting together to 0:04:12.040 --> 0:04:14.760 create all three companies out of two but one of 0:04:14.800 --> 0:04:18.320 which will be an exact lookalike with seeds and crop 0:04:18.400 --> 0:04:22.880 protection chemicals put together. It's it's an evolution in terms 0:04:22.880 --> 0:04:27.200 of R and D where the the they're developing seeds 0:04:27.240 --> 0:04:31.080 now that respond or that are tolerant of of certain chemicals. 0:04:31.080 --> 0:04:34.120 So you're you're locking in a farmer not only to 0:04:34.200 --> 0:04:36.919 the seed, but then that seed is locking in hopefully 0:04:36.960 --> 0:04:38.839 your own chemical that the farmer is going to have 0:04:38.880 --> 0:04:42.760 to use on that. That raises another regulatory issue down 0:04:42.800 --> 0:04:45.440 the road as well. But all these all these are 0:04:45.560 --> 0:04:47.640 driving yield in the field for the farmer, and then 0:04:47.880 --> 0:04:49.880 sort of the evolution of the business is where where 0:04:49.880 --> 0:04:53.680 it's headed. Is there a possibility that regulators will come 0:04:53.720 --> 0:04:55.520 back and say, even though there's not a lot of 0:04:55.600 --> 0:04:59.919 overlap in the business of Buyer and UH and Monsanta, 0:05:00.520 --> 0:05:02.799 that the combined company is going to account for thirty 0:05:02.920 --> 0:05:09.160 percent of global crop inputs business, and that they just 0:05:09.279 --> 0:05:12.800 will not allow that. Inasmuch as we've seen these other 0:05:12.839 --> 0:05:17.600 as you describe previous giant chemical deals right right, and 0:05:17.600 --> 0:05:21.120 and people should note that Monsanto Buyer is number four 0:05:21.240 --> 0:05:25.000 in the line of chemical deals, behind Keim China's and 0:05:25.080 --> 0:05:31.200 gentadpot and Pottish Corporate Agrium in the fertilizer space as well. UM. 0:05:31.240 --> 0:05:35.320 Some areas that that would probably engender regulatory scrutiny right 0:05:35.360 --> 0:05:39.400 off the bat would be US cotton seed, where buyer 0:05:39.480 --> 0:05:42.320 actually bought its cotton seed business from Montsanto about a 0:05:42.360 --> 0:05:46.279 decade ago. UH Canola, some swaving oils and and there's 0:05:46.320 --> 0:05:49.760 some some crop chemical overlap as well. And then that 0:05:49.839 --> 0:05:54.840 also raises the regulatory um outlook of looking at these 0:05:55.080 --> 0:05:57.560 deals in total, all four deals going off at the 0:05:57.600 --> 0:06:01.039 same time, how does that reshape the market, and you 0:06:01.080 --> 0:06:04.160 do raise a very very good point about the entire 0:06:04.200 --> 0:06:08.200 global crop input market being UH controlled by one player 0:06:08.200 --> 0:06:10.280 there at that point. So there's a lot of a 0:06:10.279 --> 0:06:13.760 lot of question marks, UH from a regulatory perspective. With 0:06:13.800 --> 0:06:16.440 the steel where do you see the most growth for 0:06:16.480 --> 0:06:22.560 this company? UH? Monsanto of course has UH I'd say 0:06:22.760 --> 0:06:25.440 for people who are concerned about things like gene and 0:06:25.480 --> 0:06:30.919 genetically modified organisms and crops, Europeans seem to be have 0:06:31.080 --> 0:06:33.039 kind of led the way on on that one. Is 0:06:33.080 --> 0:06:37.280 it less of an issue in Asia? In Africa? The 0:06:37.279 --> 0:06:42.640 concern about round up it's herbicide UH glyphosphate, right, the 0:06:42.680 --> 0:06:46.039 trade name is round up continues to spark not only 0:06:46.080 --> 0:06:49.200 opposition from opponents of GMO, but more and more health 0:06:49.240 --> 0:06:52.800 and environment environment experts globally are jumping on the bandmag 0:06:52.839 --> 0:06:55.239 and at some point does that catch up with this company. 0:06:56.120 --> 0:06:59.640 There's a great, great point, a very important issue there. 0:07:00.200 --> 0:07:05.719 The um, the growth um. Depending on the country and 0:07:05.760 --> 0:07:09.640 depending on the politics of the country, the growth of 0:07:09.640 --> 0:07:14.480 biotech seeds is either embraced or of the complete opposite 0:07:14.480 --> 0:07:17.680 of that um, depending on the region and how how 0:07:17.760 --> 0:07:20.880 much they need UH. The the input, the yield there 0:07:20.920 --> 0:07:23.640 from from the seeds. Um So, it's it's going to 0:07:23.680 --> 0:07:26.360 be continue to be a good growth story or the 0:07:26.520 --> 0:07:29.440 driving growth story is really the adoption of biotech seeds 0:07:29.440 --> 0:07:33.600 and the upgrading of those said seeds. UH. The roundup 0:07:33.640 --> 0:07:37.080 product is the most applied herbicide in the in the world, 0:07:37.720 --> 0:07:42.400 and it is UH Monsano seeds are basically any genetically 0:07:42.400 --> 0:07:45.360 modified seed and I'm generalizing a little bit, UH is 0:07:45.520 --> 0:07:48.720 tolerant of that herbicide. It's a it's a key UH 0:07:48.760 --> 0:07:53.520 input in the global agg business. And it's that it's 0:07:53.560 --> 0:07:56.080 been that way for almost twenty years now at this point. 0:07:56.640 --> 0:07:59.080 Um So, there there is pushback and it depends on 0:07:59.120 --> 0:08:01.480 the region, but it's it's going to be a continued 0:08:01.520 --> 0:08:05.760 growth driver for this new company going forward. Have we 0:08:05.840 --> 0:08:10.360 seen this type of consolidation before in the chemicals industry? Uh? 0:08:10.560 --> 0:08:13.280 This is UH this is sort of a unique time 0:08:13.280 --> 0:08:15.200 in the chemicals industry in the last year or so, 0:08:16.000 --> 0:08:18.880 UM not that I can remember. It's been a while 0:08:19.320 --> 0:08:22.160 UH for for this level of consolidation. But as as 0:08:22.200 --> 0:08:26.239 growth slows and people are looking for better ways to 0:08:26.280 --> 0:08:29.200 put their balance sheets to work, cheap debt and slow growth, 0:08:29.240 --> 0:08:32.840 I think it's a resulting in this wave of mergers here? 0:08:33.760 --> 0:08:37.400 And what are you hearing from analysts beside yourself? You're 0:08:37.400 --> 0:08:39.839 certainly an analyst Bloomberg Intelligence, But what what? What is 0:08:39.880 --> 0:08:42.319 this sort of the consensus or is there a consensus 0:08:42.320 --> 0:08:47.199 on the street? Um? I think the the street consensus 0:08:47.240 --> 0:08:51.280 could could be characterized as a coin flip between people 0:08:51.360 --> 0:08:54.120 that like the deal and don't like the deal, So 0:08:54.160 --> 0:08:57.640 that I guess the consensus is there's an even lack 0:08:57.679 --> 0:09:00.200 of consensus on the street as as to the the 0:09:00.240 --> 0:09:02.280 merits of the deal and who's getting the better of it. 0:09:02.679 --> 0:09:06.400 A lack of consensus for a sixties six billion dollar 0:09:06.600 --> 0:09:09.760 deal for mont Santo and UH and buyer. Is there 0:09:09.760 --> 0:09:12.480 anybody left? I mean, every now and again I hear 0:09:12.640 --> 0:09:15.360 be a SF might have been interested in a bid 0:09:15.440 --> 0:09:20.920 for Monsanto? Is there anybody left left to buy? Um? 0:09:20.960 --> 0:09:23.920 Not really, you would have to go much smaller in 0:09:24.040 --> 0:09:28.040 scale among the crop chemical companies, UH and the fertilizer 0:09:28.040 --> 0:09:32.280 companies to where these deals are taking place. B A 0:09:32.440 --> 0:09:34.880 s F has gone it alone. They actually have a 0:09:34.880 --> 0:09:38.440 an R and D relationship with Montsanto, which I guess 0:09:38.440 --> 0:09:41.800 they'll now have with their their fellow countrymen down the road. 0:09:41.800 --> 0:09:46.560 There UM once those deals consummated. But there's there's only 0:09:46.559 --> 0:09:49.640 really three or four large players of a global scale 0:09:50.080 --> 0:09:52.600 in the market, with a sort of a mere mid 0:09:52.640 --> 0:09:56.240 tier UH to follow. But there's not much left, all right, 0:09:56.600 --> 0:09:59.760 Christopher Prela, you certainly covered that story up one side 0:09:59.800 --> 0:10:03.200 and down the other. Buyer agreeing to buy Monsanto in 0:10:03.240 --> 0:10:06.360 a sixty six billion dollar deal will be the largest 0:10:06.400 --> 0:10:08.760 take over the year if it goes through. I'm Cafe Mason, 0:10:08.800 --> 0:10:10.600 pim Fox, and this is Bloomberg.