Elanco to become No. 2 in animal health with Bayer deal

Elanco Animal Health CEO Jeff Simmons speaks during an interview at the New York Stock Exchange (NYSE) on Sept. 20, 2018. (Photo: Reuters/Brendan McDermid)

Reuters — Elanco Animal Health agreed to buy Bayer’s veterinary drugs unit on Tuesday in a cash and stock deal valued at US$7.6 billion (C$10 billion), creating the second largest maker of medicines for livestock and pets and expanding Elanco’s reach online.

The deal is the latest in the fast-growing animal health market, which has recently seen Elanco floated by Eli Lilly and Co., and rival U.S. drugmaker Pfizer also spinning off its veterinary medicine business.

It also adds to the list of assets sold by Bayer, as the German company looks to slash debt from its $63 billion takeover of seed maker Monsanto last year and as it braces for a potential settlement of lawsuits over an alleged cancer-causing effect of Roundup herbicide (all figures US$).

The two companies said Bayer would receive $5.3 billion in cash and $2.3 billion worth of Elanco stock based on a price of $33.60 per share, the 30-day average price as of Aug. 6.

Elanco said the stock amounted to 68 million shares, or a stake of about 18.2 per cent based on Refinitiv data, but the number of shares could rise or fall by as much as 7.5 per cent, depending on Elanco’s share price performance on the closing date.

Refinitiv data on 373 million outstanding shares does not yet take into account the dilutive effect from an as-yet unspecified capital increase that Elanco plans to carry out.

The price tag for the deal implies a multiple of 18.8 times adjusted core earnings, Bayer said, adding it would sell the equity stake over time.

Reuters reported last month that Bayer had approached Elanco to discuss a possible combination that would be number two after industry leader Zoetis and ahead of unlisted Boehringer Ingelheim — which bought animal health assets from Sanofi — and drugmaker Merck and Co.

Market researchers expect the $44 billion animal health sector to grow five to six per cent per year, driven by an increase in livestock farming and, more importantly, by more people wanting to own pets and spending more money on their wellbeing.


Bayer is the world’s largest maker of flea and tick control products for cats and dogs, with Elanco praising its “top presence on Amazon” with “industry-leading e-commerce/retail capabilities.”

“The move combines our long-standing focus on the veterinarian, while meeting pet owners’ changing expectation of pet care and access to products,” said Elanco CEO Jeffrey Simmons.

Elanco, in its release, said the deal “accelerates (its) portfolio transformation by elevating Companion Animal to nearly half of the overall business.”

In its livestock segment, Elanco said, the deal would give it a number of “anchor” cattle brands, create a “bio-protection” portfolio and expand its aquaculture business to include warm-water fish.

In Canada, Bayer’s livestock portfolio includes cattle and swine antibiotic Baytril; cattle, swine and sheep antimicrobial Baycox; poultry immunostimulant Victrio; varroa mite controls Checkmite and Bayvarol for honeybee colonies; and various insecticides for use on livestock and in barns.

Bayer, in a separate release, said the agreement with Elanco gives all Bayer Animal Health employees “at least one year of employment protection against unilateral termination with similar and no less favourable benefits in the aggregate.”

Elanco said it planned to fund the cash payout to Bayer with a combination of new debt and equity, with the size of the equity capital increase depending on future market developments.

Bayer has recently sold its 60 per cent stake in a chemical park operator as well as consumer health brands Dr. Scholl’s and Coppertone, with combined proceeds of close to 2.4 billion euros (C$3.5 billion).

Credit rating agency Moody’s said the Elanco deal would improve Bayer’s ability to reduce its debt load and shoulder an expected settlement of the Roundup cases. S+P and Fitch, in turn, flagged the risk of a credit rating downgrade for Elanco.

Equity analysts at Citi said Bayer sold near the top of the price range the brokerage had projected. It expects Bayer to buy back three billion euros worth of its own shares in 2020 to offset lower earnings per share from the divestments, with the remainder of the proceeds used to speed up debt payments.

Analysts have put the likely Roundup settlements at $5-$10 billion, with many saying the share price reflects exaggerated market expectations of a $20-$25 billion hit. Bayer strongly denies a carcinogenic effect from using Roundup.

Elanco said it expected the transaction to close by the middle of 2020.

Reporting for Reuters by Ludwig Burger; additional reporting by Aakash Jagadeesh Babu, Kanishka Singh and Saumya Sibi Joseph in Bangalore. Includes files from Glacier FarmMedia Network staff.



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