Bayer Material Science, as the plastics unit is known, may be valued at more than 12 billion euros ($15.5 billion) and the drugmaker could use the proceeds from a divestiture to buy Zoetis Inc. (ZTS), the U.S. veterinary-products maker spun off from Pfizer Inc. in 2013, said Jeffrey Holford of Jefferies LLC. Zoetis has risen 12 percent this year, valuing the Florham Park, New Jersey-based company at $18 billion.
Zoetis would be an appealing target. A deal could boost Bayer’s 2015 profit by about 6 percent if it were to pay a 30 percent premium to Zoetis’s closing price Sept. 17 and fund the purchase with cash, according to data compiled by Bloomberg. That implies a takeover price of
almost $48 a share. Veterinary companies are benefiting from growth in emerging markets, where people are spending more on pets and also eating more meat, increasing the need for livestock.
“Buying Zoetis would give Bayer an instant leadership position, and it seems like they’ve expressed wanting to be leaders in the spaces they compete in,” Kevin Kedra, an analyst for Gabelli & Co. in Rye, New York, said in a phone interview. “It would give them a business that has stable cash flow, steady growth and a relatively predictable business in an area that they know pretty well.”
Marijn Dekkers, Chief Executive Officer of Bayer AG.
Missing Out
Bayer has come up short on animal-health deals before. Eli Lilly & Co. beat Dekkers to Novartis AG’s veterinary business this year. Dekkers weighed a bid for the Pfizer unit in 2012, before it was clear Zoetis would be spun off, people with knowledge of the plans said at the time. His predecessor, Supervisory Board Chairman Werner Wenning, bid unsuccessfully for Schering-Plough’s animal-health division five years ago.Now, after telling Bayer he’ll only stay in his job until the end of 2016, when he plans to move his family back to the U.S., this may be one of Dekkers’s last chances to remake the company, said Fabian Wenner, a Zurich-based analyst at Kepler Cheuvreux.
“I would say he put this one on the conveyor belt,” the analyst said in an e-mail. “With its implementation, he may view his job as being done so he can move on as a ‘transformer.’”
Guenter Forneck, a Bayer spokesman, and Bill Price, a spokesman for Zoetis, declined to comment on a possible deal. Dekkers said on a conference call with reporters yesterday that he wouldn’t speculate on acquisition targets.
Bayer’s Step
“We didn’t take this step so we could quickly buy something again,” he said. “Of course that doesn’t mean that if there was the possibility for a deal we wouldn’t take it.”Bayer rose 0.7 percent to 113.50 euros at 9:02 a.m. in Frankfurt, adding to yesterday’s 6.2 percent surge that lifted the shares to a record. Zoetis shares gained 0.1 percent yesterday to close at $36.70 in New York.
Zoetis is No. 1 in the global animal-health business, with $4.56 billion in revenue last year. Bayer is in fifth place, with 1.31 billion euros in last year’s sales after Merck & Co. (MRK), Sanofi (SAN) and Eli Lilly. Merck bought Schering-Plough in 2009.
“Zoetis is the far and away the leader,” said Connor Browne, a Santa Fe, New Mexico-based portfolio manager at Thornburg Investment Management Inc., which oversees about $80 billion, including Zoetis stock. “For sure there’s room for consolidation within the animal-health space, and clearly Zoetis could play a role on either side.”
Cash Infusion
Bayer Chief Financial Officer Werner Baumann told reporters on the call that the company would prefer an initial public offering of the plastics unit, which would give Bayer a cash infusion. Also on the table is a spinoff, in which Bayer shareholders would get shares of the new company. The second option wouldn’t provide cash for Bayer.The German company already boosted its life sciences business with one deal this year, agreeing in May to buy Merck’s over-the-counter products, including allergy medicine Claritin, for $14.2 billion. Last year it agreed to buy its partner on one of its new cancer drugs, Norway’s Algeta ASA.
Bayer will keep on seeking bolt-on acquisitions to boost its life sciences units, Dekkers said yesterday.
The CEO wouldn’t comment in more detail. In July, he told analysts Bayer is looking at the importance of critical mass in animal health in light of Eli Lilly (LLY) buying Novartis’s business and Zoetis’s public listing. A need for critical mass was behind Bayer’s decision to buy the Merck consumer health business, he said.
“Whether that’s all translatable also in an animal health business is an interesting strategic question that Bayer is occupying itself with and has for some time,” Dekkers said. “So stay tuned on that.”
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