Bayer has bought Aventis CropScience for E7.25 billion.  It’s a good deal for the German group, which will become the world’s second largest agrochemical producer. Bayer should see substantial cost savings from merging the units. It’s also good news for ACS’s owners, pharma companies Aventis and Schering AG, who will gain cash to cut debts and boost their R&D pipelines.

German industrial group Bayer has agreed to buy Aventis CropScience for E7.25 billion in cash and assumed debt. The unit is currently 74% owned by Aventis and 24% by Schering AG. The company will merge Aventis CropScience with its existing agrochemical unit. The merged unit, called Bayer CropScience, will be the world’s second largest agrochemical producer after Switzerland’s Syngenta, with sales of E6.5-7.0 billion for 2001.

It looks like a good deal for Bayer. Agrochemicals is a good business to be in, with companies seeing margins of around 20% despite the poor state of much of the chemicals industry. Economies of scale are substantial, making the potential savings large. Bayer expects savings of E500 million per year, with approximately the same one-off cost to cover integration.

Better still for Bayer, the fact that there are now just six major agrochemical companies with almost 90% of the market makes further consolidation unlikely for antitrust reasons. Even though Pharmacia plans to sell its 85% stake in Monsanto next year, Bayer CropScience is likely to remain one of the largest players.

But it’s also good for Aventis and Schering, who are escaping from a business that has little in common with their core area of drug development. Aventis will get E3.7-3.8 billion in cash, while Schering will get E1.5 billion. Aventis will use the cash to cut debt, while Schering plans to make acquisitions.

Aventis needs to cut its financial costs to meet its savings targets. Schering, meanwhile, is smaller than many of its rivals, and has a comparatively weak pipeline in CNS and dermatology. Acquisitions should help ensure Schering’s future growth.

The debt-financed acquisition has again raised hopes that Bayer will sell its healthcare unit. The business does not have the scale of rivals such as Aventis, and the markets do not have confidence in its management. Selling it to another pharma company and focusing on successful operations such as agrochemicals may well be the best move for Bayer.

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