Does Bayer’s acquisition strategy of Monsanto factor in the ECB bond buying program? It would be brilliant if it has in fact factored that in.
According to the terms of the European Central Bank’s bond buying program, Bayer would be eligible for receiving funding for its planned acquisition of Monsanto.
In a surprising turn of events Monsanto had mentioned that it has received an unsolicited bid from Bayer for $62 billion. The U.S. based company is the world’s largest seed bank. Although it has turned down the offer it has stated that it is open to negotiations.
As per the ECB’s bond buying program, the central bank is eligible to buy bonds issued by companies based certain criteria including, the company should be located in the Eurozone, have an investment-grade rating and not a bank, have its denominations in euros and meet certain technical requirements.
Crucially, the purpose for which the bonds are issued is not a criteria specified by the central bank, who is set to buy corporate bonds from the market as well as directly from companies from next month onwards.
In theory this could mean that as and when Bayer finances its acquisition of Monsanto, which it said it would do with a combination of debt and equity, the ECB could buy Bayer’s bonds.
“It will be interesting to observe how much of such a deal would be absorbed by the central bank,” wrote analysts at UniCredit in a note.
In an effort to revive the economy, the ECB is absorbing 80 billion euros ($90 billion) worth of assets every month. Through this borrowing program it is essentially lowering debt costs.
However, sources in the central bank have disclosed that Bayer’s bond, in the event of its acquisition of Monsanto, would not be its first choice. They have qualified this reservation saying, if the EBC were to subscribe to Bayer’s bonds it could have a silver lining as it could give fresh impetus to the stock market as the move would make the industry more competitive.
Although Bayer has had investment ratings from Fitch, S&P and Moody’s, all three agencies have said they are in the process of reviewing the rating following its offer to Monsanto.
Moody’s has said Bayer’s move could possibly lead to a few notches of downgrade but it does not anticipate that it would impact its investment-grade status.
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