BASF Is Sleeping Giant on Deals as Bayer Makes Moves on Monsanto

With an aversion to overpaying and conviction that a conglomerate approach is best, Germany’s BASF SE has so far sat out the biggest-ever consolidation wave in the global crop chemicals and seeds industry.

In the lead up to Bayer AG’s unsolicited takeover proposal for Monsanto Co on Thursday, Chief Executive Officer Kurt Bock has talked up thrift, balking at the price tags placed on assets. Rather than betting the farm on a big deal and challenging arch agrochemicals rival Bayer for Monsanto, Bock appears content to stay out of the fray, ready to selectively buy up any businesses that may come to the market in the dust of mega deals.

“Bock would probably be pleased if the agro business was a bit bigger but doesn’t consider that he’s missed any deals,” said Lutz Grueten, an analyst at Commerzbank. “He doesn’t believe that they’ve failed to make good on a strategic opportunity.”

The decision by Bayer to move on Monsanto comes as Swiss pesticide-maker Syngenta AG is working through regulatory hurdles to become a unit of state-owned China National Chemical Corp., a $43 billion deal unveiled in February that left the five remaining competitors looking to pair up to strengthen their positions. It also follows hot on the heels of Dow Chemical Co.’s planned merger with DuPont Co. BASF, the world’s biggest chemical company, is now the odd one out.

BASF spokeswoman Jennifer Moore-Braun declined to comment. In response to what he called expectations that a big deal could be in the offing, Bock pledged in February to “rationally examine” potential targets.

Until recently, BASF’s success has been underpinned by its conglomerate structure under which basic chemical production feeds into output of specialized ingredients for cars and shampoo. Now, following the oil price crash and an aging of its portfolio spanning pigments and additives, there’s more pressure on management to adjust the model, according to Tim Jones, a London-based analyst at Deutsche Bank.

“Change may be on the horizon with management also under increasing pressure to simplify the conglomerate, " he said, adding that BASF isn’t so conservative as to stay completely put.

No Big Deals

Potential moves could be acquiring assets from Dow and DuPont when they merge, doing a joint venture in agrochemicals, and a possible de-merger of its oil-and-gas arm Wintershall, according to Deutsche Bank.

BASF shares were 1.4 percent lower at 66.70 euros at 3:15 p.m. in Frankfurt. They have lost almost a quarter of their value during the past 12 months.

The Ludwigshafen-based company has never done a mega deal. Its biggest acquisitions since 2009 include Swiss dye-maker Ciba Holding AG for around $5 billion and German ingredients-maker Cognis Holding GmbH for 3.1 billion euros (3.5 billion). It bought Engelhard Corp., a U.S. inventor of catalytic converters, in 2006 for about $5.4 billion.

While investors may worry about BASF’s strategic position if all the other major players combine, they are equally rankled by the prospect of large mergers. Shares of Bayer plunged as much as 7.6 percent amid concern that a large purchase like Monsanto, which has a market value of $42 billion, would weigh on its credit rating and force the company to sell more stock. The proposal by Werner Baumann, who’s been at Bayer’s helm for less than a month, follows Monsanto’s failed attempt to buy Syngenta.

White Knight

For BASF, a purchase of Monsanto at a 50 percent premium to the undisturbed share price could imply a return on invested capital of below 5 percent in the first year of consolidation and the need for just over 30 billion euros in equity issuance, which is out of character for BASF, according to a JP Morgan note.

“If Bock were to come forward as a white knight for Syngenta or if he were to outbid Bayer for Monsanto, then you would get to multiples where he couldn’t create value in terms of enhanced ROCE for years, maybe even decades,” said Commerzbank’s Grueten. “That means he has to argue that he would destroy value.”

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