Daily Management Review

ECB Rules Show Bayer can get Financing from the Central Bank for Monsanto Bid


ECB Rules Show Bayer can get Financing from the Central Bank for Monsanto Bid
Based on the terms of the ECB's bond-buying program, Bayer could have a second chance and could receive financing from the European Central Bank that would help to fund a takeover of Monsanto.
While saying that it was open to negotiations, Bayer's $62 billion bid for acquisition of the U.S.-based Monsanto, the world's largest seed company, was turned down by the later on Tuesday.
Provided that the companies are denominated in euros and meet certain technical requirements and are based in the euro area, have an investment-grade rating and are not banks as well as meet certain technical requirements, the ECB can buy bonds issued by such companies.
Starting next month, the ECB would start buying corporate bonds on the market and directly from issuers and in this process the purpose for which the bonds are issued is not among the criteria set by the ECB.
After the rejection of its bid, Bayer said on Monday it would finance its cash bid for Monsanto with a combination of debt and equity and the above clause in buying bonds by the ECB could mean, at least in theory, that the ECB could buy debt issued by Bayer.
"It will be interesting to observe how much of such a deal would be absorbed by the central bank," credit analysts at UniCredit wrote in a note.
In an effort to revive economic growth in the euro zone by lowering borrowing costs, the ECB is buying 80 billion euros ($90 billion) worth of assets every month.
However, it would not be the ECB's first choice if the money it spent ended up financing acquisitions, reported Reuters quoting sources from the Central bank. Reuters however also quoted the source as saying that if consolidation made an industry or sector more efficient and if it gave fresh impetus to the stock market, there are chances that Bayer’s enhanced bid, if any, could be financed partly by ECB.
The sources also told Reuters that the euro zone would be helped by the weakening the euro against the greenback if issuers ended up exchanging the euros raised through bond sales for dollars.
Following the offer for Monsanto by Bayer, rating agencies S&P, Moody's and Fitch said that they were reviewing their ratings for possible downgrades for Bayer which has investment-grade ratings from these agencies.
While making it clear that it did not anticipate that the deal would cause the group to lose its investment-grade status, Moody's said the Monsanto acquisition might lead to a multi-notch downgrade of Bayer.
Another shot in the arm for a enhanced bid for Monsanto came for Bayer after shareholder Royal London Asset Management said on Wednesday that the German company's bid for U.S. rival Monsanto made sense strategically. The Royal London Asset Management also added that if the bid was priced at around $130-$135 a share, it would support a deal.
However RLAM would not like the board of Bayer to offer as much as $150 a share, said its fund manager Andrea Williams.