Bayer in US$66b bet that farmers will back linked-up supplies

FRANKFURT – Bayer’s US$66 billion purchase of Monsanto amounts to a long-term bet that farmers will grow to trust combinations of seeds and pesticides, rather than continue to pick from ranges of separate products.

In the short term, the German drugs and chemicals firm hopes to benefit from a marketing and sales force that can promote combinations of the two groups’ existing products.

But Bayer has said the main reason for buying the world’s biggest seeds company is to develop entirely new product combinations, such as weed killers and crops that resist them.

Some farmers, though, are wary about a merger between two of the largest players in the agricultural supplies market, concerned they will have less choice and that product bundles will be expensive.

“They sell you the seed and their special herbicide. I was offered one deal of that (by Monsanto), and I turned it down because it locked me into one supplier,” said North Dakota corn, soy and grain grower Justin Sherlock. “You can’t find it from a different company.”

The idea of integrating different farm products has been around for a while, but has a patchy record.

Switzerland’s Syngenta has pursued it since 2011, with some success in emerging markets in Asia and south America, but less in the all-important north American market.

That depressed its share price to a point where it became a bid target – first for Monsanto and then, after that failed, ChemChina, which agreed a takeover deal last year.

BIG BET

Bayer, the world’s No.2 crop chemicals firm behind Syngenta, argues better research tools such as gene editing mean compelling product combinations could only be a few years away.

Chief executive Werner Baumann, a collector of 1980s cars, explains his vision with a repair-and-paint shop analogy: “You can go and buy your own diluents (thinning agent), the first cover, the clear coat and so on, and you’re not sure how the different components interact with each other, and you don’t have the guarantee of an optimal surface. What you have with an integrated offering is the promise of an optimal outcome.”

It’s a big bet.

Bayer’s bid for Monsanto is the largest ever all-cash takeover offer. Analysts at Deutsche Bank and Jefferies have warned the financial burden could drain funding from Bayer’s pharmaceutical business, which is struggling to sustain the rate of past blockbuster drug launches.

The German company is paying a hefty premium now for the promise of a business model that some say could be up to a decade away. That’s in contrast to Dow Chemical and DuPont, whose shareholders will share future spoils and risks of a combined agribusiness in a merger of equals.

What’s more, Germany’s BASF, the world’s No. 3 pesticides maker, thinks product bundles are a non-starter.

But according to one industry expert who has advised all the major global suppliers, it could take 7-10 years for newly developed product combinations to have an impact. He spoke on condition of anonymity.

Complicating their quest for a new business model, Bayer and Monsanto have said digital services – a combination of data gathering, predictive software and precision farming gear – will have to serve as a “hub” in any product suite of farm supplies.

Also, innovation is not just the preserve of established players, with independent, venture capital-backed start-ups looking to break into the market too.

For the time being, though, farmers may take some convincing they should tie their fortunes to a product suite from a single supplier.

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